Role of Small Scale Industries in the Age of Liberalisation Sebastian Morris1 Rakesh Basant2,3
I. Introduction This paper focuses on the role that small firms would play in the Indian economy as it transforms itself. The current policy constraints are identified, and the areas that need action are highlighted. It is argued that a better understanding of the process of evolution of the modern small scale sector in the late industrialising economies can help India make appropriate policy choices. It is also suggested that in the age of liberalisation and globalisation, any attempt at creation of a competitive small scale sector in the country would need to explicitly take note of the emerging global production and knowledge networks. We also argue that small industry policies ought to be viewed as an aspect of overall industrial development policies. In section II, we place the evolution of the small scale sector in India in the context of the experiences of the late industrialising countries. We summarise the available data on the growth of small firms in India to show that the growth of the small sector in recent years has not been very remarkable. Section III provides a critique of policies to argue that macro-economic, trade and exchange rate policies have constrained the growth of the small scale sector in India. Apart from the need to correct the distortions in these policies, the comparison with the East Asian economies highlights the importance of the linkages between the small and large firms for generating a dynamic small scale sector. These linkages in the current context can emerge in clusters with significant scope for domestic and international inter-firm alliances. These can also emerge in specific sectors where Indian small and medium firms have built significant capabilities over the years. The success of the Indian effort in gaining out of the increased tradability of knowledge industries would depend crucially on the success of such clusters as in IT, pharmaceuticals and auto components. Given these possibilities, in Section IV we bring out the situation and potential with regard to knowledge clusters in which small and medium firms can play a seminal and advancing role. In addition, since conventional subcontracting can still play an important role in creating dynamic small firms, the factors that facilitate subcontracting relationships are also discussed here. This helps identify areas for policy and strategic action. In Section V, given the policy critique in section III and the emerging opportunities discussed in Section IV, we draw attention to the key policy issues, and suggest changes that can lead to a fast growing economy in which small firms play their natural and seminal roles. II. Growth and Transformation of Small Firms in the Context of Late Industrialisation4
Small firms in India have a crucial and seminal role to play which arises out of both the late industrialisation context and the particular historical experience of industrialisation thus far that has contributed to the evolution of the industrial structure. Analysing the Indian reality in the context of the experiences of Japan and East Asia and the insights of Dennis Anderson (1982), it is argued that macro economic, trade and exchange rate policies do not favour the rapid growth and transformation of small firms, even as they do not favour manufacturing in India, in a situation where Indian manufacturing has to compete with many countries but most notably the dynamic East Asian.
Professor, Indian Institute of Management, Ahmedabad -380015. email: email@example.com Professor, Indian Institute of Management Ahmedabad -380015. email: firstname.lastname@example.org 3 This report was prepared by consultants for the Asian Development Bank. The views expressed in this report are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequence of their use. 4 The essentials of the arguments contained in this section are derived from Gerschenkron (1954), Rosenstein Rodan (1943); Nurkse (1954). More recent studies have highlighted them in empirical terms (see Lee, 1981; Datta-Chaudhuri, 1981; Amsden, 1989; Morris, 1997; 2001a and Ozawa, 1985a, Hoselitz, 1960; Nagaraj, 1986).
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East Asian economies which are well on their way to industrial transformation5 provide the necessary context of late industrialization. In such a context we expect the first of the modern industries to begin as enclaves with a great degree of import dependence and/or vertical integration. This is because the scale and scope economies are already too large to start small and then scale up. Consequently, the beginnings of new industries have to be necessarily at large scales and take advantage of composition economies too. This results in a greater role of the state or more generally of conscious coordination. Therefore, instruments and measures like - planning, public enterprises, large corporations that internalise great diversity of activities like the chaebol - have their functionality. As these industries take root and reach sufficient depth, modern small scale sector takes shape as the need to internalise within large corporations declines. The growth of the domestic markets and the input-output linkages (especially between small and large firms through a variety of networks) facilitate the evolution of the modern small scale firms. But in the interim period, the success of large firms which typically manufacture consumer goods such as textiles, means of transport, building materials, and other materials like steel and plastics means that there is large displacement of traditional craft industries that would have earlier in part have catered to these very segments. The decline of the traditional labour intensive small sector at times leads to a decline in employment on the net basis unless the growth rate of output is very large and unduly large capital intensity is not chosen in the modern enclaved segment. Successful late industrialisation experiences with sustained high rates of growth are typically accompanied with high rates of agricultural growth which relaxes the wage goods as well as the home market constraint. Successful agricultural transformations, in turn are accompanied with land reforms (Alam, 1977). As this industrial transformation continues small firms are either completely modern and/or are in typically thick inter-firm linkages among themselves and with large firms; or when non-modern (i.e. using craft technologies) would have had large terms of trade shift in their favour (Morris 2001a). Moreover, the pursuit of export led growth (simultaneous pursuit of export promotion and import substitution along with macroeconomic policies conducive to the pursuit of high growth also contributed to high growth rates. These policies included financial repression, directed credit, incomes policies to control inflation, highly (structurally) undervalued exchange rates, functional controls, besides state investment in areas of market failure –education and infrastructure (Morris, 1997; Kim, 1983; DattaChaudhuri, 1981). II.1 Late Industrialization and the Indian Context Overall, the growth of the modern small scale sector in the East Asian economies was contingent on very rapid growth rates which could be achieved due to the right policy mix, some ingredients of which have been mentioned above. The transformation process briefly discussed above needs to be analysed in the context of India to understand the emerging policy needs for the small scale sector. The Schism in the Labour Market Underlying the industrial transformation of the East Asian economies was a Lewisian process whereby labour from less productive (often non-tradable) sectors got transferred to more productive (generally tradable – exports as well as import substitutes) sectors. Functional differences in the wage rates of the less and the more productive sectors facilitated this labour mobility. In the case of India, historical developments along with a variety of policy induced rigidities (e.g., Factories Act and other labour legislations) have meant that the difference between the wage rates in the organised large sector and the unorganised small sector has been very large. This schism in the labour market has been dysfunctional leading to lower absorption of labour in the organised sector and constraints on the growth of the modern small sector.6 Since small firms prefer to remain small to the reap policy benefits, it has also stunted
These unambiguously are South Korea, Taiwan, Hong Kong, Thailand, Malaysia and China; and now possibly Vietnam. The contrast of the Indian with the East Asian economies is worth examining. Japan had some schism in the labour market though this was nowhere as high as in the case of India. In Taiwan the `schism’ was much less. In Thailand at about the same level as in Japan, and Korea and China far less. As such the role and significance of the small firms is considerably less in Korea and China than in Taiwan, Thailand and Japan.
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the growth of small firms and they have not been able to reap economies of scale. The dual structure of industries could be sustained due to the policy induced protection provided to the large firms, mainly from external competition. This not only allowed large firms to pay higher wages but also created incentives to opt for more capital intensive technologies. Any convergence of the two markets would is likely to result in faster growth of the small firm sector. A more liberal labour policy, therefore, seems desirable for the growth of the small sector in India. However, flexibility in labour use in the large sector has increased in recent years partly due to the decline of the labour unions. Besides, with subcontracting by small firms there is sufficient labour flexibility at the systemic level. Thus, while reduction in schism in the labour market would be useful, we would argue (see details below) that the role of conservative macro economic and exchange rate policies in constraining expansion of the small firm and more generally the manufacturing sector is the more significant one, which needs to be reversed. Slow Growth, Idle Labour and the Inter-Firm Linkages As mentioned, high rates of growth have been critical for rapid transformation of the small sector in the late industrializing countries. In India the slower growth rate has meant that the small firm sector continues to have a large traditional sector. And the slow labour absorption has in turn stood in the way of technological growth of the small especially the modern small firm sector, even as the large enclaved sector has increased the gap between its capital intensity and that of the small modern sector. It has also resulted in a slower growth of inter firm linkages which are most crucial to the engagement of the (disguised) unemployed labour from agriculture and the traditional small firms. The poorly developed linkages also stand in the way of cost reduction and hence of greater market access in an open economy that the Indian economy is today. It is important to understand this two way linkage. Today small firms in themselves (with only the assistance of trading houses and aggregators at best) cannot access the global markets (or for that matter even the national markets), since the challenges of packaging, standardisation, approval and certification, scale economies in transportation and trade, licensing, advertising, retailing and marketing more generally, technology scouting, keeping to changing trends and new designs, which are all the competitive factors and have large indivisibilities or scale and scope economies are all loaded against the small firm. But the one advantage they have is their access to the competitive labour market. On the other hand large firms could potentially invest in developing the competitive factors, but they lack of the advantage of access to the low cost labour market. The cost difference is quite large being as much as eight times higher for the large firm (Joshi and Joshi, 1976). Thus, large firms have the handicap of being denied the factor cost advantage of the country. This dual handicap is most visibly exposed when the trade barriers are reduced, and industry as a whole is unable to bear the severity of import competition and exports too remain small especially in the comparative advantage products (Morris, 1998). The only hope for such an economy to be able to retain its manufacturing competitiveness is to develop deep inter-firm linkages especially between the large and the small that allows the strengths of both to be brought on to the competitive challenge while their handicaps are negated. But this cannot happen merely by the urgings of the government or academics. Nor can it in any direct actionable sense be a policy priority. The decision to make/buy, vendor development on the part of the large firms, and the decision to be a production appendage of a large unit in the case of the small firm in question are all internal to the firms. Firms must see merit in such relationships and view the investments that they need to make to develop and nurture such arrangements as being worth while, It is interesting that in sectors where growth has been high or in regions where the growth has been high the degree to which such relationships including subcontracting have developed has been significantly higher than in slowly growing sector or regions. Thus, this positive structural (and organisational) change being itself a function of the growth achieved by the manufacturing sector means that in a policy sense the key to both higher growth of the sector, to the transformation of the sector and to the adoption of vendor development and more generally inter firm linkages lie in macro economic policies that have a
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high impact on growth. These are of course monetary and fiscal policies, exchange rate policies, besides the supportive infrastructure, and in the longer term in polices that relax other frictional constraints on small firms and on industries more generally. What is true about the development of inter-firms linkages is also true with regard to the transformation of some of the traditional small firms into modern firms, as also the transformation of some small firms into large firms, and most importantly of the adoption of productivity enhancing technology and investments in firms. There would of course be a secondary role for policies that directly bear on inter-firm linkages, such as removing current constraints to equity participation by large firms in small firms; FDI restrictions on trading and actions and policies that ease the prospects of collective action by small firms especially in clusters. Small Firms’ Role in Tradables Small firms’ comparative advantage lie in manufacturing especially those that involve a greater share of value added from labour –especially semi-skilled and skilled labour - and in the Indian context even unskilled labour (as long as disguised unemployment is not completely overcome). Manufacturing is also the most tradable of all sectors especially the output of manufacturing that is standardised, competitive and has long shelf life. Successful industrialisers (especially late industrialisers from densely populated economies) show the crucial role of labour intensive manufacturing in the transformation of the economy, especially in exports in the early phase of their transformation (Kojima, 1985; Ozawa, 1985). The reason for the same is easy to see since the social price of labour is technically zero when this factor is in surplus, so that its engagement via labour intensive manufacturing exports is the first and most important opportunity. Since small firms have a comparative advantage in labour intensive manufacturing, and in an acute manner given the schism in the labour market in India, it goes without saying that no great exports are possible without the small firms’ dominant and productive role in the same. This also gives criticality to the key complimentary role of larger firms – that give out subcontracts, aggregate, and trade in small firm products. Indeed in a micro action sense promotion of such trading houses and integrators as also freeing small firms to perform this most vital role may be crucial (Morris, S. 1998). This is most amply observed in the case of East Asia especially Japan.7 In India small firms dominate in manufacturing exports being responsible for as much as two thirds of the same from India.8 With this background, we now turn to the analysis of available data on the small scale sector in India to see if some of the issues raised above can be empirically documented. II.2 Trends and Patterns in the Growth of Small Firms in India Since rates at which economies grew during the industrialisation phase have been critical for the growth of the small sector in the East Asian economies, we need to have a broader understanding of the trends and patterns in the growth of industries and then examine the growth of small firms in relation to the same. Appendix -A provides a review of growth and development in India since 19559 National Accounts and the Small Firm Sector In terms of recent industrial growth, the period since 1997-98 has to be sharply distinguished from the earlier periods. Figures 2 and 3 provide the trends10 in GDP and industrial output
In China though, given little schism in the labour market, industry size have only a weak effect if at all on the price paid for labour, so that exploiting labour, and the development of complimentary (competitive) factors is possible within the same managerial hierarchy. 8 The point though is that relative to the size of the economy or to its potential, the total volume of exports remains small and much of the manufactured exports are of the absolute advantage variety. 9 We provide this only to make our reading our of the growth experience of the Indian economy clear to the reader. 10 De-trended log data is used here. We can argue a priori that GDP (output of an entire economy) of a capitalist economy has to grow exponentially since only that from is consistent with stationary positive returns. Thus the transformation that is most useful in bringing out trends and fluctuations is the de-trend of the natural logarithm of values of GDP etc, Visually they call attention to the trends over sub-periods in relation to the period average growth rates. The growth rate over a sub-period is higher when upward sloping and lower when downward sloping and being equal to the average when horizontal. They also draw attention to the turning points. Another valid operation is to take the change in the exponential (symmetric) growth rates, which we may characterize as the “shocks” or the “innovations”. More formal analyses which test hypothesis can only follow such analysis. In other words the tendency in empirical work to allow the data to determine the functional form is in a sense erroneous.
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Post structural adjustment growth has been about 7-10% till 1978-79 after which much smaller till 2001-02 of about 6-7% (Figure 6). Macro data only on unregistered and registered manufacturing is available which shows that the recovery from the stabilisation has been rapid for both sectors but since 1996-97 the slow down is marked especially for the registered segment. Employment growth in the SSI sector for whatever it is worth shows a fall from the 5. Nevertheless a few trends can be discerned. When the exports over the entire period from 1973-74 to 2000-01 is de-trended and considered. The relatively poor performance of industries and manufacturing during this period is not independent of the slow down in the small firm sector (Figure 7). the number of SSI registered units which had been steadily falling over the 1980s continued to do so (falling from about 9% per annum to about 5% per annum by 2001-02). These show a rise of about 2. During the high export growth years after the stabilisation the growth rate was held at levels between 6-7% per annum (Figure 9). 199596 12% 1996-97. Exports growth performance since 1986 has been in the high 20% plus with short three year variations. Moreover. industrial growth rates and especially manufacturing growth rates have not picked up until very recently. Despite the many details11 here. The Non Factory Sector The NSS has been brining out the quinquinium surveys of the non-factories – the so called unorganised sector of manufacturing. but few of the interesting questions that an economist would like to ask are covered in these surveys!
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There is a lot that is of concern to the socialist. then one clearly sees the rise in exports (higher than period average growth rates) since 1985-86 which is maintained till the mid-nineties and even during the stabilisation period. 1994-95 -8. The Index of Industrial Production (IIP) with 1993-94 as base (Figure 5) also shows the same picture of a high growth after the structural adjustment with the following rates of growth (1993-94: 5. Ahmedabad
.(NAS) and major sectors. The monthly data on the Index (Figure 4) also brings out the same picture. In the eighties growth after 1982-83 has been high at rates around 10% per annum. While services have continued to grow fast after 1997. and then to a collapse to under 6%). The unregistered segment (nonfactories) also shows slow down but still maintains the low period average growth rates (See Figure 3). if the data is to be trusted the period of the nineties has been one of major slow down in the growth of small firms. The unregistered segment includes both modern small firm (the non-factory component) and the household sector and as such is not reflective of the modern small firms with which we are principally concerned with. The growth rates for gross value added are computed by first deflating the value added with the implicit deflator for manufacturing GDP and then computing the exponential growth rates per annum. Nevertheless we put together the same to construct Table 1.9% all approximate).5%. But exports collapse from 1996-97. Thus.5%. When the value of production over the entire period from 1973-74 to 2000-01 is de-trended and considered the value of production of the registered small firms seems to have slowed down ever since the 1990s. Since 2003 one sees a moderate pick up though. with a sharp fall in 1996-97 the year the exports collapsed.5 to 6 % per annum in the eighties to about 4 to 5% after the stabilisation and then to a further fall after 1997-98 (Figure. it is cumbersome to put together the information with a view to working out even the estimates of growth in such important indicators as employment and value added. After 1998 the industrial growth rate (manufacturing) has hovered between 5 to 10% and never gone above that level. Even the stabilisation of 1990-91 and 1991-92 did not reduce the growth rate of exports. 8). given the late depreciation in the eighties. DCSSI Data Data on the officially defined small firm sector is not clear because the definition has undergone changes and these pertain to a set of firms that that are traced by the DCSSI. The high growth of the period immediately following the stabilisation may have been a small interruption.
controls and extension. while others relate to fairly specific issues. This would mean that the lower end (non factory) small firms have indeed grown slowly in the nineties.
Policy Distortions and Slow Growth of the Small Scale Sector
Several studies have suggested that policies may have constrained growth and/or building of inter-firm linkages between the large and the small. Unrecognised Macroeconomic Determinants For most scholars. to the great detriment of the Indian economy.
Indian Institute of Management. of about 60% in the seventies. Similarly infrastructural policies and development which has a special impact on the sector since most firms would not be able to develop their own infrastructure have not got the systematic attention they should have (Morris. directed credit. small industry policies have typically meant the narrow sector oriented policies such as reservation. 2001). Some of these are general. S. for the period as a whole.e. Ahmedabad
. The major impact of macroeconomic both monetary and fiscal policies on the sector have been almost entirely missed in both the government’s own discussion of policies and in the debate among academics12. This assumption could at best be right for a minuscule part of the then existing small firms which were largely household. Since it contains both the modern small firms and the household/traditional units which are expected to expand only very slowly. Besides the intrinsic problems of comparability the two years in question may also have been special. 2001b). Nevertheless hesitatingly we would measure the employment elasticity to be 34%. III. The employment growth rate on the whole was 1.5% per annum. Then it was believed (quite wrongly as the subsequent developments and the historical experience of Japan and elsewhere in the late industrialisation context would reveal) that the traditional typically handicraft based industries producing a wide variety of consumer products could gradually and through continuous investments and up gradation of technology make the transition to modern medium and small firms. the growth rate in real value added has been about 3. We would argue below that macro economic policy distortions are large and continue to be the most important determinant of the growth and change within the sector.
III. This is a continuing un-examined vestige of the past (perhaps functional then) approach which sought to develop small firms as an integral part of the Mahalanobis strategy. and 2000-01 was very much a recessionary year so that for the period as a whole the growth rates are underestimated. These may have also restricted the participation of small firms in the modern tradable sector. et al (2001)] call to attention of this aspect has not taken up in the discussions in circles close to the government.5% in urban areas and 5% in the rural areas.
It is disheartening that our [Morris.segments. the ASI small factories plus the non factory non-household units using the Census. The ‘Protection’ Syndrome The un-stated but most evident assumption in the policy has been that ‘small firms need essentially to be protected”. and government regulation. Thus 1989-90 was a period of good growth. This measure and the overvaluation of the currency that resulted from the pursuit of vanilla import substitution negated the potential that the industry had to ride the post war penetration of manufactured goods markets of the advanced capitalist countries (Morris. Clearly the output growth of this group has been quite small.1 Some General Policy Trends and Issues A variety of policy issues have been cited for the inadequate performance of the small scale sector in India. We begin with some general concerns. This is somewhat smaller than that of the measurement of the ‘middle sector’ i. duty concessions. no firm conclusion can be drawn on the slowness of the growth of the modern small firm sector in the nineties on the basis of the aggregate information. Nevertheless since the DME sector in which there is little chance of the ‘household’ /traditional kind of units being included.2 %. The average increase for the period as whole is 3. Protection from large was integral to this strategy and this was sought to be built inter alia by the ban on capacity addition in industries like textiles in the mill sector a policy which remained in place until 1984.
. the major distortions against the small firm sector continued and had deepened. Orthogonal Policy Essentially the policy was orthogonal to the direction of evolution of industrial structure. biscuits and confectionery. small firms could potentially play a more functional role despite the many distortions that continued. many textile items. States in order to attract industries began to declare areas as backward. reservation was deepened and an inefficient production system put in place. ceramic and other manufacturing industries that existed in the medium and large industries. others that survived imposed large hardships on the firms. stationary items etc.
Indian Institute of Management. the manufacturing and light industries were to be very much in the small. Small firms were seen as locatable practically anywhere –as long as the basic physical infrastructure could be provided –water electricity roads etc. Thus. and neither could agriculture given the slow growth there. While the curbs on the CLarge sector were most effective. It is only since the mid-sixties that the modern small firm sector could emerge due to the expansion of the economy (slow up to 1969).” While the positive impact was that many technology based small firms came about.Losing the Manufactured Export Boom India among all developing countries had the best endowments and initial conditions to take advantage of falling tariffs over the various GATT rounds not only in textiles. some did this more wisely than others by declaring a taluka adjoining a large city as backward. The resulting actions were quite disastrous. Political and Social Agenda in Small Industry Policy In the period of redistribution (1965 to 1980) and continuing until well into eighties. Most of the industrial estates that did not have access to reasonably sized central places were failures. and through the exploitation of the schism in the labour market. the expected flowering of the small firms to produce cheaply the consumer goods did not materialise. Since the plan developments (1956-65) could not ensure the absorption of labour. Besides reservation government purchase. Still other like chemicals in being spread out in the name of regional development and backward areas development ended up maximising the externalities of pollution. 1993. With the massive biases against exports (given the strategy and the macro economic policies that compounded the distortions) the only option for manufacturing industries was to get into import substitution. In the process. and import substitution was taken deeper. 1986). small and medium firms began to be promoted for another additional reason viz. Even the nineties have only led to a partial correction of some of these distortions while others have increased in their intensity. electrical. credit and equity support. and due to the de-facto fragmentation of large firms (given the capacity curbs and the deepening schism in the labour market). to “diversify the social basis of capitalism. In the eighties the modern small scale industries came into their own including through subcontracting and vendor relations (Nagaraj. Thus. and increasing differentials in the taxes paid by small firms vis-à-vis the large were important measures (Desai and Taneja. since they had to bear the high cost of inappropriate locations and the denial of the natural agglomeration economies that small firms necessarily demand. The Regional Development Agenda Regional development ever since the Mahanlaobis Plan was seen as integral to the development of small firms. the negative aspect was that small firm policy continued to be focussed on the entrepreneur and the surpluses he could make rather than economic benefits to the country. Examples would be chemicals. During this period up to about the mid-seventies the economy was woefully short of wage goods not just because of inadequate agricultural surpluses but because the expected larger rise in the consumer goods of the right quality and types from the household industries could not materialise. but in a whole host of light engineering. many sectors where the small firms did hot have any particular advantage were promoted. Morris. And while the large sector was expected to focus on high tech and long gestation capital and basic material industries. simplistic statements such as steel plus electricity. But the policy continues to assume that small firms need protection. with a policy of regional dispersal equals regional development were articulated. 2001). even if the spirit or the purpose of backward area development was vitiated. and making control over pollution virtually beyond the capacity of small firms.
or industries that produce perishables (bread for instance). The real effective exchange rate of the rupee has been higher than the value that prevailed at the end of the stabilisation period.2 Macroeconomic Policy Distortions Today
A large number of specific macroeconomic policy induced distortions that work against the small scale the sector. ease of diffusion of ideas.
Indian Institute of Management.which tend to be regionally dispersed. lower cost of infrastructure since there are critical minimum levels of infrastructure production below which they become prohibitively expensive. processing and aggregating bulk materials found in scattered lots. sharing of communication including transportation links which in fact develop as the cluster reaches critical sizes. It is worth remembering that the export led growth economies greatly undervalued their currencies
Indeed the agglomeration economies and the economies of a variety of inter firm linkages are so large that the survival of small firms over the phase III of Dennis Anderson (1982) in a major way is contingent upon their realisation of these economies in clustered locations. The agglomeration economies arise from input output relations. plastics. become unviable and have been closed down. As a result any substantial growth impetus in the second half of the nineties that may have come. and many other factors that are too numerous to be listed envisaged ex-ante. ready availability of a variety of services in clusters. Conservative Monetary Policies Monetary policies have been unduly conservative and amount to targeting money supply. the manufacturing sector has realised poor growth relative to its potential and this hurts the small firm sector Exchange Rates Not Aggressive Enough We have already argued earlier that small firms’ comparative advantage lies in exports and tradables goods production more generally. Exchange rate policies have been particularly hurtful of small firms especially in areas like textiles which are dominated by small and medium firms. In unnecessarily curtailing demand. 2002). repair of implements. Once the danger of inflation was over (since 1996 the inflation is almost entirely on the supply-side and caused by rising agricultural and fuel prices) the policy should have shifted to interest rate targeting and supporting fiscal expenditures especially when the fiscal expansion has been on account of (efficiently directed) infrastructural spending. have as these measures were retracted. This inversion which since the reform was at its peak in the late nineties has declined but many still remain. and metals semi manufacturer than on finished products.13 We shall revert to the issue of clusters in a subsequent section. Small firms of the special kind –agro processing. etc. ease of associating together to sort out problems of common concern. and in which locations they did not have the time to overcome the location related infirmities. common pool of factors. therefore. sharing and monitoring each others behaviour and performance. and particularly hurt small firms since they have a comparative advantage in manufacturing in the original sense of the term. monitoring the development of new products and technologies. coordination economies. have tended to be arrested by this monetary conservatism. III. Additionally. since the monetary targets are being adhered to rather rigidly.The reality is that small firms can hardly ever be the basis of efficient regional industrialisation since the agglomeration economies are large. Tariff Inversion Tariffs are not entirely free from inversion that is higher rates on inputs like steel. the very high uncompensated costs of energy especially electricity and petroleum based energy which are not vatted even for export industries impose large costs on location of manufacturing in India (Morris. should not detract from this essential aspect of small firms. Indeed so large are these that many small and medium firms which had been pushed into inappropriate locations through fiscal and other concessions and through administrative measures. energy. If it can move back to those values the small firms’ export can rise as can also manufactured goods production that is based in India. Ahmedabad
Indian Institute of Management. are responsible for this phenomenon. etc) reduce greatly the incentive to save in the form of fixed bank deposits. to hold on to monetary targets. the interest rate being higher than necessary the risks in foreign capital inflows are small leading to excessive flows. and they are also subject to credit squeeze through delayed payments and extension of credit lines in purchases. Figure 1 brings out the relative undervaluation of the currency (from its ‘purchasing power values’) that is policy induced –i. Banks have poor incentives for accounts development.(subject them to a structural undervaluation) for long periods to get the export engine running before it could take off on its own steam based on virtuous productivity spiral to become less dependent upon exchange rates. nor have the banks ‘need’ for large spreads come down. Even in the credit flow the share of small and medium industries has come down rapidly in the wake of reform (See Figure11). The distortions have not reduced with “reform” of the financial sector. This is because the restrictions are imposed asymmetrically more on these firms. While some part of this effect is inevitable in a situation of bunched capital inflows that is over responsive to Indian growth prospects. a larger part of the same is induced by the inappropriate macro policy of monetary targeting. These more than any other factors critically constrain the credit access of small and medium firms. making for lesser intermediation than what would have been possible otherwise. Perverse Incentives in Banks Furthermore. Such tightening of credit conditions operate asymmetrically as between firms that have access to foreign capital inflows and foreign direct investments firms on the one hand and domestic firms that do not have such access. Indeed the tendency of the RBI to use (higher) interest rates to stem possible balance of payments (BoP) problems and generally to keep these higher than what is warranted by the closure of the Fischer-open condition is at the root of the problem. The structure of the banking industry which restricts competition between banks as also the internal processes within banks. especially those that are on the verge of making investments that are productivity enhancing and allowing firms to cope with high quality standards and tighter delivery schedules etc. Ahmedabad
. tax deductions allowed on other bonds and funds (infrastructure funds. Additionally.
“Tight’ Credit Situation The large capital flows both on account of portfolio flows and direct investment have the undesirable effect of imposing tight credit conditions on domestic firms when these capital inflows are sough to be sterilised. Figure 10 brings out the declining share of financial savings flow through banks. Such provisions were indeed made in the first few budgets that followed the
A Fischer-open condition (not the weak form of purchasing power parity) is said to exist when the expected rate of depreciation of the currency ex-ante (as measured by the currency premium in the forward market) is systematically larger than the actual realised depreciation. It is particularly adverse for small firms since these more than other firms are dependent upon intermediated banks for sources of finance. The NPA problem of public sector banks was sought to be overcome inter alia through large budgetary provisions that would allow them to write off loans and meet the capital adequacy norm as per the international Basle Convention norms. The allowed high spread to banks.e. Under tight credit conditions there is a triple squeeze on small firms. and the control over deposit rates as also the numerous incentives for so called “small savings”. the share of financial savings taking the banking route has been steadily declining. 1997). when the structural and other determinants of exchange rates have been duly allowed for. structural distortions with regard to the regulation of banks and to the incentive structures within banks have also been responsible for further accentuating the credit difficulties for small firms.14 Similarly. It shows that China has since 1979 followed the East Asian economies into export led growth with strategic undervaluation of the currency while India may be said to have made the beginnings of the correction to a more ‘equilibrium’ value of the currency (Morris. Since small and medium firms have a comparative advantage to access bank funds (while large firms could go on to markets) there is an implicit discrimination in these distortionary policies.
Reservation Perhaps the most important critique of the existing policy is the continuation of reservation. and could hardly ever go for equity and debt markets. emerging entrepreneurial opportunities (see discussion in the next section) for small firms are not exploited. 1993. In reality though. and payments to government and other staff down the line. means that the process of disintermediation is accelerated since even as banks have little motivation to lend out of the smaller share of savings that they collect. Such erroneous data not only colour the perception of outsiders with regard to the riskiness of lending to small firms but also that of bankers themselves. the tendency to place a higher value on being self employed (however. if the sector as a whole could have looked forward to high rates of growth. S.16 Banks for reasons known only to them.stabilisation. 2001d). In this regard though there is widespread recognition that reservation should go. Existing VC institutions have a banking mindset. See Morris. Small scale start-up funding is virtually not available. Since 1995 the tendency has been to shore up he profits of banks by “allowing them” a large spread between lending and deposit rates by administratively fixing deposit rates. 2001d). the fact that banks earn high interest on SLR securities (risk free rate being high due to monetary policy). and their off budget nature. They in not allowing for a continuous movement of the boundaries between the many types and sizes of firms. The distortions imposed by reservation are far too many but essentially they hurt the dynamic development of competencies within the economy since they rigidly define the activity distribution between small and large firms once and for all.
Indian Institute of Management. Despite that. de-reservation should have been easy enough. Chapter Finance) for details on the expected sources of funds for a variety of firm types. constrain the unfoldment of dynamic comparative advantage. These perform far more poorly than do food for work and employment programmes more generally. biotech and nanotechnology industries. report the data on lending to small firms that include the loans made out under these special employment etc schemes! Most of these loans are giveaways at best. other service industries that look forward to large growth in the market. Industrial transformation is about realising dynamic comparative advantage. These impose biases against small firms that are inherently dependent on credit markets. While reserved firms do show some efficiency penalty in the static economic sense (Desai and Taneja.15 Sickness and Erroneous Data Many poverty alleviation and other targeted programmes take the form of self employment support especially credit programmes despite their known failures.
A thin section of the small firms that are in the dynamic and changing industries could in the process of their growth into large firms access venture capital. poorly) and the larger scope such programmes provide for leakage. S (2001. 16 For a discussion along the lines of the expenditure process and the perversities therein in public expenditure see Morris (2004). being an anathema and in complete contradiction with the tenets of a liberal economy. Ahmedabad
. This large and continued spread. These include little dynamism and growth and greater dependence on government purchase (Morris. firms in areas such as software. have kept them alive and thriving. Underdeveloped Venture Capital Industry The capital market imperfections reflected in the non-availability and high cost of credit are compounded by the fact that the venture capital industry in the country is quite underdeveloped. Naturally the overall sickness and loans outstanding against small firm appears much larger than they are. But the problem has been viewed as being political. Morris. are beset with bureaucratic norms & target orientation or focus on the growth phase of enterprises (see Box). In reality the non-performing loans outstanding against small firms is quite small much smaller than in lending to medium and large firms. The real problem is that they stand in the way of the unfoldment of dynamic comparative advantage by not allowing for a continual evolution and movement of the boundary between small and large and in general between markets and other modes of coordination. more importantly there are major behavioural differences between those that manufacture exclusively reserved items and others. As a result.
it is desirable that multilateral assistance disbursed through TDB and SIDBI is decentralized. SIDBI also suffers from bureaucracy and time consuming norms. Besides. In the case of many products. Therefore. and in scope i. As firms in the small scale sector take to the production and sale of such products under reservation. Altering the environment of small firms in such a manner as to remove or attenuate the pressures for change leading them to being locked into particular product markets with declining growth. Their focus has been limited only to larger cities. GSFC) and have stopped funding. Private VCs are not interested in start-ups. 5. 4. MD. TDB is run by non-experts and is very bureaucratic.. Ahmedabad
. a large number of potential start-ups are outside their ambit. it is important to find out if capital market is adequately equipped for such growth.Box: VENTURE CAPITAL AND SMALL SCALE SECTOR In the context of the fact that changes in global industrial structure and technology can create significant opportunities for new enterprise creation in the small scale sector. Tenure of top level management is short and the executives at senior level and middle level are career oriented and risk averse.g. They focus on private equity for their investments. Politicians set false target which inculcates corruption and thoughtless investments. once the externalities and dynamic effects are recognised. they take upon themselves marketing. Inappropriate choice of technology when the products with scale economies are forced to be produced in the small. the economies of scale arise in marketing.
Thus. This is so because many of the state financial corporations are sick (e. Besides. Such potential for in-house development and R&D remains muted in firms manufacturing reserved items. The resources can be made available to properly selected and professionally managed entities with proven track record. Gujarat Venture Finance Limited. Being a 100% government institution. pp.131. a condition which is ridiculous for a start-up. but its operations as a direct VC agency for SMEs has been focused only at IT industry. they typically do not fund projects below $ 8-10 million and very few SSEs require such funding. their VC division has been staffed with their own people from the term lending division who lack experience in VC operations. A small segment of small firms everywhere are able to take advantage of the freedom that exists in small organisations to innovate and create. Both have fairly centralized operations. Therefore.e. Multilateral funding available to each state is confined to large infrastructure projects. small firms that do get VC funding are over-capitalized because appropriate VC inputs are not available. Inappropriate division of labour across firm sizes. Moreover. TDB also provides only large amounts but few small firms require such funding. Besides SIDBI in direct financing has also been slow. et al. There has not been enough focus on other sectors.g. Problems with state financial institutions have partly come about due to the “target orientation”. It is risk averse and seeks a good track record of profitability. the joint economies in selling or marketing many related items. The government essentially provides start-up funding through two sources – TDB and SIDBI. For whatever little startup or growth funding they provide.g. Local offices are not VCs (development bank orientation) and training levels are very low.
Indian Institute of Management. 3. the bar is being raised continuously. RIICO) have reduced their scale of operations considerably. For start-up support local funding is important both for proper needs assessment and for managerial support (mentoring). while others (e. For example.135 and 136): 1.. as only 40% of the IT fund corpus has been invested in 26 companies in the last five years. SIDBI has its own schemes that are not well known. 2001. Based on interactions with Vishnu Varshney. Schemes have a variety of restrictive clauses. The general consensus is that angel funding is virtually not available and sources of start-up funding are drying up. The costs of R&D and D&D in certain specific activities tend to be very low. being a public sector organization they cannot pay high salaries and attract good talent. The costs due to the interaction of reservation with the government's purchase policies. While SIDBI took good initiative in Venture Capital as fund of funds. Their takeoff has been very slow so far. Given the problems with the state level institutions. The disbursement of capital is centralized (VC office located at Mumbai) and it is expected that applications will come through local SIDBI offices. the national level refinancing institutions (e. The interaction also creates a large market for cheap or "shoddy" goods. an activity that is best done at large scales. reservation can be seen to enhance the costs paid by the economy (and the sector as a whole) in a variety of ways (see Morris. IDBI) have reduced their fund flows and have become very strict. Given all these problems. especially advertising. Funding from SIDBI has not percolated down equally and uniformly in the country especially in small and mid size cities. Therefore. and the nature of income distribution.. there is a tendency among institutions to convert themselves into universal banks and focus on more lucrative channels of retail banking. 2.
The key policy issue then is to understand how such useful linkages can be induced and strengthened through policy initiatives. some studies have emphasized that geographically bounded clusters should be viewed as systems of knowledge accumulation rather than just production systems (Bell and Albu. A recent review of the literature (Basant. Recent studies have focused on dynamic efficiencies that emanate from learning at the cluster level. the linkages between sources of knowledge that are internal and external to a cluster have become important. Ahmedabad
. customers and so on. In recent years. the unfoldment of the division of labour and economies of specialization. Small Firms. In the process. Fragmentation of markets. certification agencies. knowledge flows are largely a function of cluster firms’ effort to acquire knowledge from various sources. external firms. The purpose of this part of the paper is to highlight some of these changes and the emerging challenges. Besides. vertical disintegration of production. A set of fragmented markets equal in size to one large integrated market has altogether different implications for the adoption of technology. has led researchers to explore the causes of dynamic efficiencies at the cluster level. The associated policy options are also highlighted. There is enough evidence to show that the notion of passive technology diffusion in clusters is significantly over-stated.
Indian Institute of Management. located within and outside the cluster (see Basant 2002 for details). or labour cost reducing innovations.1 Industrial Clusters and Small Firms
The dynamism and persistence of competitiveness of small firms among industrial clusters.6. Existence of linkages and the potential of building new ones that can facilitate knowledge flows are obviously useful. Moreover. to the extent that reservation keeps markets small. 1999. Therefore. Policies that facilitate knowledge creation and flows that build capabilities of firms in a cluster are therefore critical for their long term competitiveness. An application of ‘innovation systems’ concept to a cluster requires an analysis of capabilities internal to the cluster (or firms in a cluster) and their linkages with external knowledge sources including organizations like universities. 2002) suggested that the nature and quantum of knowledge flows in a cluster would depend upon its (a) internal characteristics. Globalisation. cater typically to small markets. Knowledge flows can take various forms. Sub-contracting and Emerging Entrepreneurial Opportunities for the Small Firms
In the age of liberalization. 2001). Mytelka and Farinelli. Clusters and Knowledge Flows The "knowledge focus" of cluster studies is of recent origin and we know very little about the nature of knowledge flows and their determinants. the small firms can no more remain isolated from the global technological and structural changes. There is ample evidence to suggest that knowledge relating to the 3 Ps (products. availability of skilled manpower and inter-firm interaction within the cluster. Cluster studies in the 1980s focused on static advantages of clustering that essentially emerge from lower transaction costs. IV. processes and practices) gets transferred to cluster firms through a variety of mechanisms. the expected increase in capital/labour ratios in the long term is prevented. IV. Given these changes. even in the wake of globalization and liberalization in the 1990s. suppliers and institutions etc. both policy makers and enterprises will need to proactively search for new opportunities of growth. or for accumulation. Reservation which makes it possible for small firms to produce items of mass consumption in firms regionally distributed. firms in geographically bounded clusters use a variety of sources for knowledge acquisition – customers. 2000. Apart from other issues. which depend upon the extent of the market. the role of external linkages of a cluster in knowledge flows is increasingly being recognized. is prevented. R&D institutions. competitors. (b) external linkages and (c) external policy and economic environment. Clusters. Mytelka and Rellegrin.
testing. enhances inter-firm linkages in a cluster and contribute to knowledge flows. the convergence of technologies. The potential of knowledge flows through GPNs is extremely high as these networks integrate a wide variety of entities to which the flagship is linked: subsidiaries. growth of export. al. knowledge flows to a cluster will probably depend upon the ‘location’ of the cluster in this network and on the strategy of the network flagship. it has been suggested (Ernst et al. extensive use of ICTs has made these links easier and facilitates exchange of knowledge. horizontal links remain weak. extent of diversification. 2001 and Ernst and Kim 2001). At the same time. considerable learning can take place. Ernst and Kim. But these policy initiatives will need to be reviewed in the context of the policy distortions discussed in the last section. Table 2 provides a summary. MNCs etc) and so on. nature of markets. not ‘excessive competition’ seems to enhance such processes. Knowledge flows can relate to proto-typing and ramping-up. These cluster specific factors can include: size of the cluster. It once again underlines the importance of policy distortions discussed above. There is also some evidence to suggest that increase in competition. presence of MNCs in a cluster can also help build capabilities through knowledge flows. those created through the creation of science parks in recent years tend to focus on specific sectors. This issue is important from the point of view of “designing” a cluster by policy makers and for locating enterprises by entrepreneurs. would also imply creation of multi-sector clusters to be a better policy option. levels of competition.Nature and Determinants of Knowledge Flows Available literature on geographically bounded clusters suggests that various dimensions of the cluster contribute to knowledge flows in the cluster itself. “moderate” and. 2001) are an organizational innovation that enables network flagships to combine concentrated dispersion with systemic forms of integration. trade liberalization and other liberal economic policies have facilitated the growth of production networks spread across continents (see Ernst et. But this evidence seems to suggest that the gradual liberalization process may be more appropriate. 2001. division of labour (and the associated buyer-supplier relations). External alliances. Ernst (2002) argues that even when GPN activities do not involve formal R&D. Other important factors relate to public policy and macro-economic environment (Basant. policy induced or otherwise. briefly referred to below. suppliers. This has changed in recent years with external linkages becoming an important focus of enquiry as these are increasingly seen as major sources of knowledge flows.17 Exports and alliances are also increasingly becoming important.. tooling and equipment. A large variety of variables have been identified that contribute to knowledge flows in a cluster. policies that enhance participation in GPNs. The emergence of GPNs and ICTs has modified the external linkages of a cluster in a significant manner. Induced clusters. joint ventures. Overall. affiliates. process adaptation. 2002). Ahmedabad
. higher capability inducing more interaction). While GPNs strengthen global decentralization and specialization of production. formation of alliances. as they tend to result in “excessive or unfair competition”. Moreover. mainly vertical linkages develop during such period. nature of products (hi-tech v/s traditional). location (developing/developed economy). This makes the role of policy instruments enhancing competition complex.
Indian Institute of Management. distribution channels. a process which India seems to have adopted. Given this elaborate network. global production networks (GPNs) and exports are probably the most important "external" linkages for a cluster today. sharing of knowledge by MNCs and adding directly to the capability of cluster firms would be useful. Besides. But this will depend on MNC’s behaviour vis-à-vis knowledge sharing. In general. This in turn seems to be influenced by the levels of dominance of MNCs in a cluster (e. subcontractors. the literature seems to have focused more on intracluster linkages than on linkages outside the cluster.g. product customization and supply chain coordination. links with other clusters and noncluster firms (global networks.g. Is diversity of the cluster important for technology flows and cluster growth? Some evidence suggests that diversity may contribute to sustainability and resurgence of a cluster due to synergistic knowledge flows. benchmarking of productivity. R&D alliances and other cooperative agreements such as standards consortia.
GPNs. like IT and biotechnology. an enclave like situation may reduce interaction with local entities) and the capability levels of the cluster (e. The importance of diversity in a cluster would suggest that designing of mono-industry clusters may not be very useful. Therefore. Similarly.
have a preponderance of SMEs but include significant numbers of large firms. whether within or outside the cluster. namely information technology (IT). we would have got the policy right for most of the modern and dynamic segments IV. there is no evidence on whether such linkages are on the rise. Ahmedabad
. However. The key argument is that changes in technology and global industrial structure provide growth opportunities for Indian SMEs and policy initiatives will need to explicitly recognize these emerging opportunities and use appropriate instruments to facilitate the utilization of these opportunities by Indian firms. The next top 47 firms with a turnover between 100 and 1000 Crores had a share of 35 per cent. outsourcing etc. Moreover conventional policy studies in internalising the governmental or administrative categories of small firms (purely manufacturing) pertaining to the SMEs in these industries are few and far between. also becomes evident from the changing structure of specific sectors globally and the changes in technologies that are making decentralization of R&D and production possible.) for the growth of small firms in India. Except for some anecdotal evidence. These sectors are IT. However. 2003). This suggests that the relatively low entry barriers in IT industry.. Firms with turnover of less than 100 Crores (98 per cent of the total firms) had a share of only 11 per cent (NASSCOM. Besides. They are also modern industries. About 88 per cent of the total firms have a turnover of less than Rs. The emerging opportunities are very diverse. If cost pressures and extension of IT related infrastructure lead to a rise in such links whereby domestic small firms can participate in the contracts undertaken by large domestic firms and MNCs. 2001. This suggests that policies enhancing exports would be useful. The discussion will throw up some new policy needs in addition to a few that have already been referred to in the discussion so far. so that in getting the policy (both macro economic and at the level of the cluster / region and industry) right for these industries and for the SMEs in them. MNCs have a significant share of about 45 per cent in the ITES market. a wide variety of sizes are intrinsically possible therein. The share of public and private limited companies is 25 and 28 per cent respectively (Table 3). 10 crore.g. A review of the available evidence throws up some interesting patterns: Importance of Small Firms: Indian IT industry has a large number of small firms managed by self employed individuals. pharmaceuticals and auto-components. labour market deepening would be facilitated. The potentially increasingly role of external linkages (e. the industry is highly skewed in terms of share of the market: top 5 firms had a share of 32 per cent in the revenues. These trends would suggest that the deepening of the IT labour market would significantly be affected by links (a) between MNCs and local firms and (b) between large and small IT firms. informal enterprises in 1999-2000.19 More than 38 per cent workers in IT occupations worked in small. GPNs. many small firms can set up enterprises in this domain.2 Emerging Entrepreneurial Opportunities in Specific Sectors for SMEs
In the context of the discussion on clusters and the important role of external linkages in knowledge flows. Moreover. The IT Industry and Small Firms18 The Indian IT industry is one of its most dynamic sectors and has seen a variety of changes in recent years. Participation of small firms in this sector has been quite high. 2003: 39-40). and are technology based with vast spillover effects on the rest of the economy. The inter-firm aspect in these industries is also very large. this section explores the emerging opportunities for Indian SMEs in three sectors.Similarly. But
This subsection is largely based on Basant and Rani (2004). pharmaceuticals and auto-components. We take up these industries because the (future) comparative advantage which is just beginning to be revealed in these industries is very large. In what follows. 2003: 39-40). we discuss three such sectors. NASSCOM. the share of MNCs in the IT sector increased from about 12 per cent in 1997-98 to 22 per cent in 2001-02 (Kumar. exposure to demanding markets generally enhances knowledge generation and flows. small firms seem to have grown slowly in recent years (NASSCOM. where these changes can provide important opportunities for Indian SMEs in the near future.
Indian Institute of Management.
Indian Institute of Management.distribution of IT occupation workers by type of enterprise suggests that deepening of the market in the form of smaller firms’ participation is already taking place. 22 Some companies tackle such problems by having stringent in-house security procedures like not allowing employees to take home source code to work on it. as firms move to software development for databases and other packaged applications. While there are many instances of this type. IP will become increasingly important. Similarly. many of which are relatively small. As large Tier-1 Indian companies who partnered foreign firms so far through outsourcing start to compete with them. A related issue is that of creating conditions whereby overseas firms directly outsource work to smaller Indian companies. 2004a). Interactions with the industry persons suggest that a large number of SMEs are also involved in this transition. it is claimed. an emerging specialization in embedded software and even a marginal shift towards products. Broadly. For example.21 For example. some of the smaller firms have made this transition faster. Emerging Technological Opportunities: Technologies underlying the IT industry are changing very rapidly.20 In fact. A critical policy concern in the near future should be the creation of conditions that can facilitate such “outsourcing or subcontracting”. depends on a variety of factors. investment intensive and profitable IT activities. including those of the outsourcing variety (see Basant. Indian firms have moved from less to more complex. two can be highlighted to exemplify the potential impact on the participation of smaller firms in the IT industry. foreign firms have started to look for smaller Tier-2 and Tier-3 Indian firms to form out-sourcing alliances. However. Obviously. The realization of this potential. Despite concerns regarding industry's lock-in into low end tasks. Some BPO companies do not download data but work only on the client's site. good telecom infrastructure would go a long way in facilitating such outsourcing. It is well known that the growth of the Indian IT industry has largely been fuelled by their participation in export markets through outsourcing or other types of inter-firm alliances. as Indian firms seek high-end BPO opportunities like claims processing. security of data made available for testing would become critical. if outsourcing or other inter-firm linkages involve application service provision. Intellectual property (IP) related issues were not so important so far because Indian firms were still largely involved in low-end work.22 For MNCs. personal data protection for overseas customers would be important. IP related issues might be critical for linkages involving complex IT tasks. Ahmedabad
. The first relates to changes in the semi-conductor industry/embedded software and the other to the interaction of IT with other industrial sectors. At a more generic level better general and technical education infrastructure would also help this to happen. The Transition to High Value-added Activities: The Indian IT industry is undergoing a major change. This would be particularly important for small firms as they cannot leverage the “reputations” that large firms are able to use to provide confidence to out-sourcing firms. the possibilities of intra-country outsourcing between large firms and small firms and between firms located in the metropolises and smaller towns can impinge on the participation of various types of workers in the IT labour market. one can see some shift towards more value added services. especially in the early part of the technology and product life cycles. For example. 2004b). however. without which it may not have been possible. Whatever may have been the underlying motivations. the transition from the onshore to the offshore model deepened the IT labour market in India as Indian firms could now utilize the segmentation in the labour market to their advantage. In many instances. these technological changes bring in possibilities of a change in the global industrial structure. The changes in the composition of the IT sector combined with the offshore model can potentially create larger opportunities of employment for workers with different characteristics. as Indian IT firms have started to do more complex tasks. a more stringent IP policy would reduce contracting costs and the cost of legal remedies (Basant. 21 Basant (2004b) documents intellectual property and alliance activities of Indian IT firms. This transition has largely been facilitated by inter-firm alliances. New technologies (especially the
Another process is making this transition faster. sharing of data would be required making IP an important issue.
The Transition from the Onshore to Offshore Model: One of the major transitions in the Indian IT industry has been the on-shore to off-shore model. risky.
SysArris Software and Kshema Technologies. A variety of new developments are creating opportunities for relatively small firms to enter into specialized high25 tech areas. With the impending changes in the IPR regimes. The complexity of R&D. With technological change several new opportunities for IT firms to work on the boundaries of other sectors like the pharmaceutical. This change can potentially "disintegrate" the semi-conductor industry providing niche opportunities for small firms. pharmaceuticals and IT. the strategic options of firms have changed. Strand Genomics. a favourable IPR regime and good implementation of the IP laws is essential for these firms to participate in decentralized drug discovery & development process where several firms perform highly specialized tasks. Basant. For example. Bhuyan 2002) and the information summarized in Basant (2004b) shows that many Indian firms are already active in this emerging domain and are participating in the emerging networks of SOC creation. the innovation system in the pharmaceutical industry has become very complex. these technological developments have created a situation where drug discovery and development may no more be dominated by large vertically integrated enterprises. it will become difficult for firms to remain competitive in all the functional design elements that are being integrated into the SOC. Indian firms will need to identify their niches and create appropriate capabilities for occupying these niches. Wipro Health Science. An appropriate IP policy therefore becomes critical for the growth of SMEs in these domains. An emerging solution for this problem is the fast growing market of design modules (DM) licensed out by small-specialized firms. biotechnology and wet chemistry based skills. where use of IT is on the rise creating new market opportunities for Indian firms to make (often IP based) entry or expansion (Basant 2004b). (Linden and Somaya. changes in the drug discovery processes also entail new opportunities for Indian IT firms to enter these domains. almost all of which are small. This would be particularly so if the entry into these niches is innovation based or if it involves use of protected technologies.26 Similar processes are underway in sectors like auto. a spin out firm from a well-known institute of science education (Indian Institute of Science. Decline in entry barriers in several segments can lead to disintegration of this process. The impending changes in the IPR regime have thrown up a variety of challenges for these firms. It is critical for long term growth of this industry that these firms do not get locked into very low end activities where low costs are the only source of competitiveness. it sure can exploit this new opportunity. Emerging Opportunities for Small Firms in the Pharmaceutical Industry There are a large number of pharmaceutical firms in India. has been on the rise due to the emerging synergies in the research streams of conventional chemistry. As SOCs become larger and more complex. It is becoming increasingly important to integrate knowledge at various levels of research in biomedical sciences. the munificence of IT based technologies across a variety of sectors has spawned several new technological and economic opportunities.SOC based ones)23 have modified global production networks significantly in the area of semiconductors in recent years. 25 See. Given good access to software.24 Similarly. many firms in India (even small ones) are well placed to occupy several spaces in this value chain. India may have missed the IC manufacturing opportunity. biotechnology and information technology (IT). Recent studies (see for example. At least. All these domains are very IP intensive and would require a more proactive participation of Indian firms in IP protection. Overall.
Indian Institute of Management. 2003) 24 Linden and Somaya (2003) provide an excellent account of these strategic market creating opportunities. which is essentially science based. There is evidence to show that Indian IT firms are increasingly exploiting these domains as well and most of them are small. Ahmedabad
. A favourable IPR regime combined with the
With the advent of System on Chip (SOC) integration in this industry. 2004b for details on these opportunities. Like the changes in the semiconductor industry. Riding on the synergies between different disciplines. All these are small firms. But this will require sharper focus on intellectual property and a more active participation in standards creation as that will drive the creation of markets in this sector. Recent changes in the innovation system in the pharmaceutical industry provide some such new opportunities (see Basant 2004b for details). Other firms active in this domain include Agilent Technologies (Life Sciences and Chemical Analysis). Bangalore) is a prime example of this trend. biotechnology and auto are becoming available. However. This will obviously lead to enhanced participation of these firms in IP generation and creation. Policy instruments that can facilitate such participation are critical. a significant share of these firms should get opportunities to move up the value chain. the drug discovery and commercialization processes are undergoing significant change.
Apparently. apart from an appropriate FDI policy. data exclusivity etc. FDI in overseas manufacturing may increase with special focus on contract manufacturing of drugs (even the ones that are still on patent). can the drug be commercialized. The company can grow and sell its product to another company that will conduct trials. the strategies that the MNCs would adopt in for countries like India will depend on a variety of factors. One. And. patent them in major international markets. the trend is that firms find new chemical entities. within the first strategy. (4) Build alliances with biotech and IT firms and also with educational institutions to develop new technologies for pharmaceutical research. It is evident that SMEs may find their niches. manufacture and commercialize the product. develop them up to a point and then license them to MNCs for further developments and clinical trials (Grow and sell strategy). An appropriate IP regime. It is also evident that the IP regime and its implementation will affect most of these strategies. especially those that have large populations with reasonable ability to pay. which are going to be off patent in the near future30. 29 These process inventions are also very useful once the drug gets off patent. both at the “product development” stages as well as in manufacturing. Grow and sell strategy can
So far. it may not even conduct expensive trials required before commercialization of the drug.
Indian Institute of Management. Two. cross licensing possibilities with the patent holder of the drugs that are affected by these inventions can be explored. As mentioned. (5) Focus on contract manufacturing of patented drugs. Moreover. This will be particularly the case with respect to product patenting. individuals and R&D institutions in developing countries like India. biotechnology and IT companies. facilitate the exploitation of these strategic opportunities by Indian pharmaceutical. the licensing arrangements are proliferating because the costs of taking an invention from conception to market are escalating. and (8) Combine some of these strategies with co-marketing/marketing arrangements. (6) Focus on drugs. (3) Focus on process R&D for patented drugs to acquire process patents and explore cross-licensing/ licensing options29. (7) Produce drugs that are off patent today. Admittedly. three strategic changes are expected to take place. more on more pharmaceutical firms may locate part of their R&D activities in India through R&D centres or through outsourcing of technological activities. from the perspective of the transnational corporations. in fact. (2) Focus R&D on drug delivery mechanisms and bio-enhancers to improve the efficacy of existing patented drugs28. Such a shift would require specialized skills of firms. who have limited resources but an abundance of low-cost and highly trained scientists. Only when the trials are successful. We may gain a great deal if India becomes a hub for R&D and manufacturing related sub-contracting in these sectors. may not only help exploit the opportunities created by the changes in drug development technology and the emerging structure of the pharmaceutical and biotechnology sectors but also help respond effectively to the emerging R&D and production strategies of the MNCs. 30 This strategy is particularly being followed to enter developed country markets as soon as the relevant patent expires. three the research portfolio of MNCs may shift (at least marginally) in favour of diseases relevant for the developing countries. including the availability of skills and capabilities as well as the nature of regulation and competition in the host countries. the costs and risks increase exponentially and so it make sense for Indian firms. At each stage. Ahmedabad
. the firms may have different options.above mentioned technological developments and the associated uncertainties may also lead to creation of networks and alliances between firms having diverse capabilities on the one hand and educational institutions & public sector entities on the other. especially small ones. a proactive regulatory structure can. Laboratory work and a series of trials and pilot projects follow basic research. for example. Emerging Opportunities and MNC Strategies: These changes in the drug discovery processes and the emerging liberal policy environment will have significant implications for the innovation system in the pharmaceutical sector and for the strategies adopted by firms in this sector. Prima facie. to focus on basic results and license the results. 28 Once this is achieved. The inventing company may not manufacture the product it has developed. Emerging Opportunities and Strategies of Local Firms: Preliminary explorations suggest that pharmaceutical firms in India are exploring the following options: (1) Develop new pharmaceutical products27.
it is important that more and more of them start looking at the emerging opportunities pro-actively. Entrepreneurial Opportunities in the Indian Auto-Components Sector The Indian auto-component sector has done very well in recent years by becoming a very vibrant and active member of the global production networks. processes and practices. drug delivery. South Korea and some other countries provided significant benefit to small entrepreneurs to protect their incremental inventions and created a market for technology licensing and cross licensing. High degrees of specialization also created a need for decentralized R&D activities. Indian manufacturing sector has developed decent engineering skills over the last forty odd years. This sector has emerged as an important segment where global production networks have achieved maturity. especially the small ones has been debated at length in recent years. Indian firms. Ahmedabad
. apart from a somewhat more stringent and nuanced IP policy regime (e. In general. In the context of the impending product patent regime. may be more relevant for relatively smaller enterprises. the availability of capital would be critical. the policy makers would need to look at “new use patents” and patents for “new drug delivery mechanisms” more closely. Since it is a fast growing employment intensive sector. Very few firms may. There is ample evidence to show that the sub-contracting and ancillarization processes in East Asia. have the product development and licensing skills and capabilities to implement this strategy. While a product patent regime should facilitate the exploitation of these opportunities. the future of Indian pharmaceutical companies. process innovations etc. they will need to undertake R&D activity. 2000). whether we like it or not. Auto majors started to expect their subcontractors to improve efficiencies continuously by undertaking modifications in products. MNCs can use it for “ever-greening” of their existing patents and the same can probably happen in the case of drug delivery mechanisms.g. Indian firms will have to gear up to the new IP regime challenges. especially small ones will not be able to benefit from the decentralisation of drug discovery and clinical trail processes. Policies and Emerging Opportunities in Production and R&D Networks If emerging opportunities in different sectors are to be exploited. it is important for policy makers to understand the emerging policy needs to facilitate this transition. Chandra and Sastry. in the auto industry have benefited small entrepreneurs in a significant manner by providing opportunities for specializing in specific activities and development. Finally. as these can potentially be areas where Indian firms can contribute. policy makers should facilitate better understanding of the strategic use of the IP protection. The policy challenge is keep patenting of both possible without diluting the novelty criteria to permit the so called ever-greening. The other strategies to exploit emerging niches in drug discovery. if a firms wishes to opt for an R&D intensive strategy.potentially exploit relatively inexpensive research skills of Indian scientists without taking undue risks. if the new use is interpreted very liberally. new use and drug delivery patents for pharmaceuticals). Without these. It will relevant to find out if modifications in the existing IPR regimes or its implementation can support such a transition. While efforts at the multilateral forums to correct the anomalies of the TRIPS agreement should continue. availability of petty patents in the case of autocomponents. There is no doubt that the life of domestic firms will not be as cosy as it used to be in a regime where product patents were granted. Both outsourcing by large auto multinationals and the technological up-gradation of the domestic auto industry have contributed to this process (Basant. The changes in the IP regime will have to be combined with other regulatory changes associated with clinical trials and approval of drugs. If the Indian auto-component manufacturers wish to get into more value-adding activities (more complex components or sub-assemblies). especially Japan. The issue of IP protection may be relevant for this sector as well. While there will be a lot of scope for firms to continue producing off-patent drugs. however. 1999. It has been argued earlier that venture capital is difficult to get for start-ups and the credit availability is in general a problem. Exploitation of relatively inexpensive research skills and process capabilities that have been acquired over the years may be more feasible. The petty patent system prevalent in Japan. Policies that help Indian auto-component firms to participate in these networks would be useful (see below).. Admittedly. Pani. Without availability of capital. the ability of
Indian Institute of Management.
entrepreneurial background and capabilities in the practices (JIT. Therefore. all. currently SSEs with excise registration does not have a significantly higher propensity to enter into sub-contracting relationships.
Indian Institute of Management. VAT can create conditions conducive for subcontracting. it significantly enhances the probability of its participation in the sub-contracting activities but not the extent of sub-contracting (see Pani. there cannot be any logic either to restraining equity (including equity participation) and other non-equity relations between small and large. As of now. as also the continuation of reservation highly restrictive to the ability of the Indian manufacturing sector to play the large role in global markets that it could. The argument becomes doubly important since in India there being ‘schismatic’ labour market the need to combine competitive factors (which is the comparative advantage of large) with factor cost advantage (which is largely denied to large firms) makes restraints on equity participation. This may have changed in recent years as MODVAT has become more pervasive. factors that influence the extent of sub-contracting in general may also play an important role to build linkages between small and large firms. Therefore. While there is some evidence that excise registration does increase the propensity to sub-contract. For a detailed discussion see Morris. Ahmedabad
. The results of some empirical studies show that if a firm produces a reserved item.) may go up even further for the growth and sustainability of SSEs making these products. The functionality of small firms well into the industrialisation process that was assured in Japan was to a large extent due to the kieretsu and earlier Zaibatsu like structures. And insofar as building of process capabilities require investment in machinery etc. S. merchant capital that organises some of these. While these would be important for firms to become part of global production networks. modern small firms and among them those that are essentially in links with large firms and so on. (2001). 2000). Only these can allow the small firms to overcome the large disadvantage of size in accessing technology and capital and not to speak of markets. Apparently.) domain are critical but as the sub-contracting linkages (especially international ones) mature process and product capabilities would also become important (see Pani.firms to exploit emerging opportunities would be significantly constrained. quality. Studies show that small firms with good technological capabilities are more likely to become part of the sub-contracting networks. this tendency was not very significant when this study was done. With VAT becoming a reality outsourcing firms would prefer small firms with excise registration as sub-contractors. incentives to enhance other capabilities might also become critical. Thus even today the need for small firms to have investments and technology flows from large and foreign firms is not adequately recognised. The ownership and size of plant and machinery aspect dominate current policy towards small firms and indeed much of the discussion. As of now policy measures to enhance the capabilities of SSEs through good manufacturing and other practices would facilitate their integration in the global production chains. product reservation does provide the opportunity for sub-contracting but the extent of which such an opportunity can be utilized depends on the capabilities of the firms. credit constraints once again may create the bottleneck for such capability formation. both domestic and global. With the ‘logic’ of reservation being out of question today. With time. the attempt of states and parastatals to band together small firms or to provide them services have typically failed. Little else but such relations have worked. In contrast the functionality derived from known aspects of the industrial structure and the expected evolution of the same. Finally. As the policy of product de-reservation unfolds. shop-floor etc. the opportunities for sub-contracting may shrink and the utility of better capabilities (practices etc. the well known large –small firm relationships and relationships among small firms. Tax breaks and other incentives for training in this area and for adopting good manufacturing practices are likely to be useful in the current phase of development. 2000 for details). should have lead to a more functional understanding of small firms – which would recognise the sharp difference s between house hold firms. incentives to enhance capabilities at the firm level would remain important as product de-reservation policies are adopted.
policies that veer towards creating entry barriers or which stand in the way of the optimal utilisation of the country’s resources are quite out of place.
Looking Ahead –Policies for Rapid Growth and Transformation of Small Firms31
Policy in a liberalised environment cannot be of the discretionary case by case variety. so that the focus of the government can shift to implementing the law rather than to its systematic vitiation by authorities and entrepreneurs alike. The reforms thus far do not have a clear strategy to address the issue of growth and employment in a clear manner except the assumption that growth would take care of the same. Nor is there any place for those that necessarily result in inefficiency or underutilisation of resources. In what follows we discuss a variety of policy interventions that are desirable. And all other units should be entirely exempt from its provisions. Ever since the early eighties labour flexibility obtained (at a price no doubt) first in Mumbai and then in the south has improved greatly the control that managers have over the production process. the first major policy insight is that the macro policies in striving for higher growth along the lines of East Asian export led growth with supportive macro policies would be the first best. especially to those on the verge of rapid expansion. While not entirely in the wrong the issue really becomes one of the rates of growth that are achieved.V. The need to rationalize the various laws pertaining to employment has been often repeated. For a liberal economy that is also transforming the issue of use of labour especially idle labour is perhaps the most important. The discussion on the late industrialising economies and other issues above suggests that a sustained very high rate of growth (above 8% in the context today in India) would of course be able to achieve this since a labour productivity growth of 4 to 4.5 % which is to be assumed can result in a labour absorption rate of 3. The list of policy changes advocated below is admittedly long. As far as the application of the Act is concerned. It is of particular interest to small firms. all such units may be brought under the Employees Compensation Act. Labour militancy has sharply declined.5 to 4% which is about a percent above the growth in the rate of the workforce. As such policies that require continual administrative energies and efforts are out of question. be brought /retained under (all) the provisions of the Factories Act. to get a broad understanding of the entire policy agenda and then prioritize areas of immediate policy action.
This section builds on the discussion in he “Executive Summary” of Morris. Thus. In any case the unorganised workers did not have the ability to resist hire and fire. Sector and industry oriented policies similarly would also have to be driven by the incentive effects of polices. Similarly. Factories Act Despite this perspective. the criteria of "with and without the use of power" be entirely dispensed with. however.
Indian Institute of Management. Ahmedabad
. S. which we hope to do towards the end of this section.’ While it is true that labor flexibility in organized Indian industry is much below that in East Asia and especially in China. the problem has been overstated. et al (2001). we suggest that. It is useful. But slower growth of around 6% which is what we seem to be achieving in the 90s (and more so the even slower growth of under 5% in manufacturing since 1998) would keep disguised unemployment alive for long. the Factories Act that introduces inflexibilities in the labour market and contributes to schism in the market needs to be modified. Labour Flexibility is Not Insufficient The militancy of labour and lack of hire and fire as a constraint on exports and on improving the competitive potential of manufacturing in India has acquired the status of being an `absolute truth. Furthermore. Thus. All units with more than 50 employees including the entrepreneur and family labour. Therefore macro economic policies need not be constrained by the fear of labour inflexibility. the transformation of firms and especially SMEs which have little autonomous capacity is itself a function of growth oriented policies.
so that the scope for additional investment (provided they are efficient) to be financed and to create its own savings exists. But it would not be fair to the export industry in India. Ahmedabad
. and capital flows are being allowed to have an influence on the exchange rate to an extent that is not warranted). One method. Since employment growth has been small especially in the nineties such household firms would have to be "supported". April 1993. Movement to high growth strategies would of course eliminate that need. and therefore for manufacturing and productive enterprises producing tradable goods. recognising that there are large flows of the order of 15 billon US$ on account of remittances which are on factor earnings. Secondly. even an exchange rate that closes the current account would necessarily mean that the trade and non-factor services deficit would have to be as high as this inflow. 33 This means that inevitably India would have to accumulate dollars faster than at present. and of the ability of the economy (and especially of small firms) to respond to price incentives. but support to high employment intensity 'traditional' industries such as brassware. It would be a red herring to argue that since the rupee is market determined there is nothing that the RBI can do. art-work and handicrafts. the real effective exchange rate (REER) has been allowed to appreciate. etc many of which are export oriented or could easily become so. or even of the larger of the small firms. Firstly this is not true when the entire gamut of fiscal and monetary polices are considered together including incomes policies. Such a pricing would be conventionally considered alright. Today they are under 25%. allowing for its fast growth. This apparent ‘anomaly’ is easily understood if we recognise that economies such as the Indian or the Chinese have vast unutilised capacities in the form of manpower available (currently engaged in low productivity industries or suffering form disguised unemployment) which can at very low cost be engaged in export industries provided the demand exists. Stepped up expenditures that allow the investment rate to rise would be feasible without a savings constraint. c. The need to slow down the decline of traditional small firms (with some of them transforming into modern firms) exists. it is necessary to considerably enhance the incentives that are available to exporters. although this would only be the second best option. It would also not be in the long term interest of the country. and so are also amenable to policies that boost exports. garments. A fairly large currency depreciation to take the REER below the level that it was after the structural adjustment. Exchange Rate Conservatism Policy in recent times (certainly since 1996-97) has underestimated the potential of the economy to grow32. See Morris. This is another version of the ‘dutch disease’ being allowed to operate. Further. and trading houses' activities are important to start the export bandwagon working. See Fig. even if we admit that the role of exchange policy is to ensure a near balance on the current account except to a small (perhaps 1% of GDP) that allows foreign capital to flow to that extent into the economy (this itself is not admitted. would hurt the sector very badly. then the exchange rate would have to be different from what it is at present. since the employment elasticity of household/traditional firms is much larger than that of the large firms. This is amply clear since the marginal savings rate is higher than the average. 14 which shows a close relationship between manufactured exports and the real effective exchange rate. In any case this would not mean continuation of reservation. S. Given the lack of a strategic undervaluation of the currency. Thus. so their declining share would have raised the potential output to be able to grow at a percent or more. Public investments have large delays and lost overruns. If 5-6% is all that is achieved in terms of manufacturing growth .
Indian Institute of Management. Recognising and correcting for the same would mean that the macro polices followed would necessarily lead to both current account and capital account surpluses! 33 Strategic Undervaluation of Currency Strategic undervaluation of the rupee.
Earlier public investments used to be about 50% of gross capital formation. Exports therefore essentially amount to demand creation that at once also relaxes the foreign exchange constraint. (2003). has become a necessity for the high and sustainable growth of the economy. would provide the boost to this sector. Fast growth of the SSI sector and of exports.Key Role of Growth Despite these changes some employment concerns may remain. the former following the latter with the expected lag of between 9 and 16 months. then it becomes necessary to slow down the decline in house-based/traditional industries. and unless corrected. But policy has not so far committed itself unambiguously to high growth.
There is of course limited scope for this measure. would be to link imports by trading and export houses at special (low or zero) duties to exports of the small firm sector.which would work as long there is significant import repression. there is an opportunity to gain from a commitment to reduce tariffs on imports. Risk funds in small firms. Thus. The removal of reservation may have to be linked to enhanced credit flow to the sector. There are strong structural underpinnings to the inadequate flow: the organisation structure of banks and the processes within them. Only real assessment and unmediated experience of banks with small firms can lower the risk perception with regard to small firms. and can at best only be marginally supplemented by external sources. which would be a tiny part of the sector.
Indian Institute of Management. and allowing for performance based incentives. world over is typically entrepreneurial and internal. and survive with less efficient use of factors. have taken them far from task orientation. The policy of directed lending to small firms (the targets for priority sector lending) ought to shift from targets or quotas to incentives to banks for lending to small firms. Instead of viewing lending to them as a constraint. It has most certainly helped particular small firms to delay improvements. Venture capital can have a major role only in industries with much technological change. This would change the attitude of banks to small firms. Regulation of Banks: For the success of such a policy the RBI would have to considerably reorient its direction and supervision of banks. Credit Related Issues Credit is the single most important constraint for small firms. Most RBI guidelines that pertain to the internal working of banks currently constrain the behaviour of officers. granting them operational freedom. Reservation has stunted the growth and transformation of the economy and of the small firm sector in particular. (and to a credible commitment on the part of government to do so). Incentivisation of Credit: Incentivisation of priority sector targets is the solution. and rule and direction based 'assessment' and lending that is current in nationalised banks. Incentivisation also aids the process of overall reorientation of the banks towards real assessment. The dynamic inefficiencies and distortions are far more significant than the static efficiency penalty that the economy pays. leading them to shirk ownership of responsibility. such as from mother units for subcontracting firms. Responsible risk taking in lending would have to re-emerge. The credit market and the functioning of banks are most vital for the performance of small enterprises. should go completely. they would begin to see it as an opportunity. rather than the ritualised. Many changes in this area are desirable. Only then would accounts development (among small firm) grow. Relaxation of FDI norms in the trading sector would also be important. and have created a specific bias against small loan portfolios. De-reservation Reservation based on the identity of the product. Ahmedabad
. It would mean heterogeneity in the way banks manage their internal processes.
where T is the normal tax rate applicable.SLR Incentives for Banks: Tax based incentives for banks and financial intermediaries are possible. in having a vast network of branches (even if some of these are usefully wound up). nodal industries. the older way of targeted lending. This necessarily means that government instead of being worried about whether SIDBI. so called rural banks would have a larger portion of their portfolio in small firms given the significant incentives that we are proposing. and in activities where vast positive external effects are anticipated. and whether in the private. The setting right of the state finance and investment corporations to not merely lend to small firms but to leverage even larger flows from banks and the markets to small firms (as also to large firms that have strong inter-firm linkages with small) is urgent. This is well known. SLR & CRR based incentives for banks too are possible. Specifically we recommend that the tax rate applicable to a bank or a financial intermediary with a portfolio of x% in small firms as a proportion of its total lending portfolio be: (1-x)*T. The Delayed Payments Act is worse than useless and should be got rid off.20 i. S is SLR+CRR and x is the share of small firms in total lending portfolio of the bank. and entirely specialised financial intermediaries are dysfunctional. and find the right balance between diversified and specialised portfolio. Nevertheless a ceiling of 4% over the prime lending rates would be called for. even if at high effective cost to the small firms. or SFC etc. With the financial sector reforms well under way. at this juncture. etc.x) where p is the benefit on SLR and CRR in lending to small firms. as mentioned above. a 20% reduction in SLR and CRR for a bank that has its entire portfolio (highly unlikely) in small firms. Instead. which not only SIDBI and SFCs but other FIs. have met their gargets should put in place incentives. Similarly for export related credit to small firms. We see a process whereby FIIs and banks would. Ahmedabad
. The risks in such credit provision are few and the costs of intermediation very low. and the comparative advantage they have. It can be a major window of profit for banks. Other Credit Instruments: Small firms which have subcontracting relations with large firms. Such a tax concession should also be extended to all institutions whether term lending or in working capital provision. whether banking or otherwise. and client size and type specialisations. An additional incentive for banks can be provided as follows: If the normal statutory reserve requirement is S. in exchanging specific infrastructural support to existing clusters of small firms. during the same period of transition. a scheme for discounting small firms' receivables from the large.e. then actual reserve requirement on a bank lending to small firms can be made equal to S*(1-p. cooperative or public sectors. promising industries. smaller private (especially domestic) banks. are squeezed by large firms. private FIs and banks could also take advantage off. The Problem of Collateral: Banks typically hold collateral far above their exposure to small units. Little is known about the actual market value of collateral held by banks. to avoid the problem of adverse selection. and the margin above PLR rates ought be subject to a ceiling We are not in favour of any concessional rates to small firms. No Concessional Interest: Concessions on interest rates are dysfunctional. by banks and financial institutions would have to be immediately put in place. Reform of DFIs: The SFCs would all have to go through quick restructuring and refocus on promotion of new enterprises typically in such areas. We would suggest p = 0. industrial estate corporations. if the RBI guidelines are amended to make such a scheme feasible. RBI should
Indian Institute of Management. forthwith. since portfolio freedom (arising from the need to diversify risk) would be a major element of financial reform. Such a scheme by discounting the receivables of small firms (payables of large firms) would go a long way to make available timely credit to those small firms that sell to reputed large firms. (SLR+CRR). develop their sectoral. The scheme would necessarily have to provide for some additional benefit (either in the form of higher credit limits or lower rates) for such participating large firms. particularly during a tight credit situation. It is natural that nationalised banks. over a period. Portfolio Tradability: Tradability of loan portfolios of small firms could be retained along with targets. optimising between risks and returns. rates not more than 2% above the lowest export credit rate should apply. such as in technology based small firms. cooperative banks. whether on term or working capital.
There are many reasons for this pessimistic picture. support to upgrade their processes and practices would be useful. we would lose out in significantly many market segments. For more ‘modern’ clusters. is high. water supply would help to improve the performance
We would rule out procedural reform to a large extent. "Jetpuri". would require immediate changes in our intellectual property rights regime. A strategy based on leveraging on trade names /brand names. Policies that facilitate these linkages are critical. The necessary ingredients for the success of such an approach. paper. would be (1) extension built around associations. This has created the problem of a significant ‘inversion’ in the tariff structure. Only significantly lower excise rates for small firms could compensate them sufficiently. etc.
Indian Institute of Management. There is a case for financial institutions to develop strong venture capital arms to finance innovative small firms that have a good potential to emerge in the near future in many industries. etc. The effect of tariff structure on the competitiveness of small firms. with much equity world wide. since their potential to produce tradables (exports and import competing manufactured goods) is large Cluster Approach Many of the traditional small firms are in clusters. plastics. many of which could be argued to be "geographic indicators". "Moradabadi". Tax Concessions The logic of continuing with excise duty concessions for small firms arises principally from two important factors. copper and many non-ferrous metals. as incomes in India rise. "Tangail". inter-linkages among firms in and outside the clusters are critical. "Kattaki". so that the magnitude of the problem can be brought to light. Despite import liberalisation the tariffs on materials like steel. power. Investments in infrastructure especially general roads. which specifically hurts small firms. and leaders from the clusters. Overcoming Tariff Inversion Inversion in the tariff needs to go or be neutralised by strategic undervaluation of currency. to reduce the risks in lending needs to be unlocked. and a cluster oriented approach would be important for their success. The potential of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. Insofar as capabilities of local firms determine to a large extent their ability to build linkages. but regionally defined collective brand-names like "Kanchipuram". The potential of the Indian market to create its own specific products. (2003). These range from IPR policies to regulation of FDI as well as the ability of large firms to hold equity in smaller firms. Costs of excise registration and dealing with excise authorities are too large. There is already movement in these areas and one may need to look for fine tuning of these policy instruments. The reader may like to consult Morris. Indeed cluster orientation would be necessary for any micro action. in the Indian context. distinct from western culture.immediately institute a study. Infrastructure Constraints Such small firms as are dependent upon infrastructure would always find constraints in infrastructure to affect them more severely than large firms. (3) financing of collectives via financing of cooperatives/associations. which are too remote from the topic. or extension. The element of geographical indicators has been added in the new IPR legislation. railways. and there is a 'fixed' component to this cost which cannot be spread over a large value of turnover34. "Aligarhi". Venture Capital Opportunities are Large: Venture capital operations remain rudimentary in India and not particularly bold. S. has not been adequately recognised. Ahmedabad
. remain high in comparison to tariffs on manufactured goods (other than consumer goods). This is because modernisation in India has to confront a parallel process of 'sanskritisation' or 'indianisation'. since that would mean that change can happen from within in an entrenched bureaucratic system. many chemicals. (2) protection to non-private. Otherwise. How it is used to our advantage has to be seen.
Besides growth orientation opening up SMEs to foreign capital and technology and to investment from local large firms would be necessary. BT Pharma and Auto Industries The opportunities provided by the modern industries that have large exports or potentially could have due to the unfoldment of the country’s long term comparative advantage –technology based and skill labour using industries such as IT. and all the factor cost advantages. and to the transformation of the sector. Industrial transformation has rarely been the all around and simultaneous growth of all industries. But there is much apprehension that infrastructural and public services constraints and poor governance in India’s cities and through its economy more generally would take its toll. High energy and power costs have all but killed Indian export industries. The solutions are quite simple. since it has its own aggressive auto firms. pharmaceuticals and auto oriented industries. could with similar policies attract FDI with a vengeance to lead the process of the exit of the world auto industry from the advanced countries. It continues to be subject to substantially large taxes. S. Besides the pursuit of macro policies consistent with export led growth it has moderate taxes on automobiles. also need to be exploited. Thus the Hyundai Company’s programme to use India as a base for manufacturing was scaled down much due to the appreciation of the rupee since the stabilisation exercise of 1992-93. The contrast with Thailand is most remarkable. For all small firms power and water continue to remain constraints shamefully after nearly 10 years of reform. Thailand with the strategy of emerging as the largest auto industry base in South East Asia has gone about promoting the industry. (1999). and cooperative solutions are hardly feasible given the power policy that does not allow distribution rights to private generating companies. The need of the hour is to take the growth of these industries to the highest possible levels. There are also structural retardants on the automobile industry. In automobiles taxes are still very large and the inverted tariffs / high cost of materials and energy that are uncompensated hurt India as a base for manufactures. This is particularly important in clusters. For example. It is a mother industry to a large number of very modern ancillaries in the southern part of the country. What is true of automobiles is also potentially true of other industries like entertainment and consumer electronics. as critical levels of achievement and performance are reached there are vast feed back effects which give very high growth rates in particular industries. For long considered as a ‘luxury’ industry the industry was all but killed through highly restrictive capacity constraints. And unfortunately there is little in the power policy initiatives that make solutions for small firms possible. India has at the moment absolute advantages in the off-shoring of many activities in these industries and with clusters like Bangalore taking root the growth prospects are immense. These can easily come down if the taxes and cross subsidies on them are made vattable. Reservation of course is an anathema in these industries since the essence of the industry in these areas lie in the interfirm aspect. and its fuel so that the home market is as large as possible. but seem to miss the policy makers. Captive generation is out of the reach of most small firms.of small firms significantly. The market is also heavily restricted by poor roads and very high taxes on petrol. computers white goods manufacture etc. Thus at least power problems could have been overcome by allowing small firms open access to generators. IPR Regimes
Indian Institute of Management. India. clarity on regulations required for the emergence of clinical research organizations is a priority for the pharmaceutical industry. Ahmedabad
. Making Way for Rapid Growth of IT. Municipal infrastructure is a major aspect of the public management failure and its correction in at least a few cities is of crucial importance to the growth of the offshoring activities and growth in these industries. Morris. The limitations here are of an obvious kind but the solutions of which may require a deeper understanding of the root of failure. BT. Almost all leading MNCs in the auto sector use Thailand as a base. Some are bound to grow much faster since with factor cost advantages. SMEs in the sector would then transform.
Other Measures Legal reforms are required. Government Procurement Concessional purchases by the state and parastatals from small firms is one of the factors responsible for sustaining a shoddy goods market in India (Morris. Any large price preferences would only lead to large distortions. and the nature of industrial policy itself has to change to recognise the needs of a liberalising economy. an introduction of a petty patent regime could considerably enhance the extraction of value from the many innovations that take place in the SME sector. administrative measures. and requiring the need for continual intervention on the part of the state. Rapid growth in India for short spurts even at close to 7% has not engendered much industrial growth and this is a matter of concern for industries as such and therefore for small firms even more acutely. A small under 5% price preference for small firms is of no harm. Government intervention itself ought to be minimal. Similarly it is most likely that with the current macroeconomic and exchange rate policies. The experiences of other relevant countries especially the successful late industrialisers of East Asia are also useful in bringing out the relative emphasis on the various measures that are highlighted. Meso-level interventions ought to be few and far between and need to be justified on grounds of market failure. S. In all these industries IPR regimes requiring much insight would have to be worked out that is able to balance the interest of Indian firms and yet lead to much industrial relocation which can then bring their own spillover benefits. Thus corrections of distortionary laws. The need to get out of the inspector raj syndrome has been in the forefront for long and cannot be overstressed. Thus a measure to promote interfirm linkages through small industry associations in clusters would be valid. Along with legal reforms. Therefore to traditionalists who still see industrial policies in terms of controls. See for instance Pandey. We have not stressed these aspects that are widely known not because they are not important. including in a comparative perspective. but not for instance marketing support to small and tiny firms.In IT. Ajay (2002). Thus there are over 7 acts / authorities that pertain to labour ranging form the Employee Compensation Act to the Unionisation act. rather than administrative or discretionary measures constitute the means of government intervention. Other admissible measures are those that develop markets and make them more efficient than what they otherwise would have been. and constitute industrial policy as such. but because we see little hope of the Indian state being able to set this right without the vast pressures that emerge from a growing and increasingly assertive small firm sector. Priority Areas for Policy Intervention In an economy that has inevitably moved towards an increasing role for markets. Our policy measures recognise the limitations on the nature of government intervention in a liberalising economy. governance reforms are also quite urgent. The issue for India today is not growth as such since growth at about 5% is almost inevitable. duty concessions to include measures of a general macroeconomic kind may seem not to address small industry policy as such. Small firms bear a very heavy burden in dealing with government. (2001d). prices and other incentive compatible measures. The links between the macro measures and the impact on small industry have been brought out. Ahmedabad
. and macroeconomic policies that are growth and employment oriented are the instruments of intervention whether for small industry. Biotechnology. India’s manufacturing would
Indian Institute of Management. The issue really is growth at rates close to the East Asian. These could be merged into one. For example. Merging of the umpteen laws and regulations into one is important. the institution of new legal measures that are incentive compatible. But the problem here is more with the processes involved in government procurement which are ‘designed to fail’. But this perception is entirely misplaced. pharmaceutical industries and other related off-shoring activities the challenges lie in bringing about better IPR regimes that reduces the risk faced by foreign firms in their operations in India. Micro-management efforts are entirely out of question so are measures that call upon the government for continual discretionary intervention. our discussion of small industry policy outside its traditional domain of reservation. activist support.
an IPR regime that recognises and protects geographical indicators are meaningful even if one were to take the position that all that is possible is for small industries to grow at their current moderate rates. are less universal and more specific. They are justified on grounds of market failure and feasibility of correction by the state.be subject to much hollowing out by China. and the current infrastructural constraints which especially hurt small firms. the removal of reservation. Ahmedabad
. The impact of the other measures which while micro in nature. Some suggested measures like a petty patent regime. aggressively pricing the currency and correcting the tariff inversions would have the most impact on small firms.
this backdrop that our policy
Thus overcoming the macroeconomic distortions of monetary conservatism. It is against recommendations need to be considered. Second in impact would be the incentivisation of credit.
Indian Institute of Management. They arise out of the obvious lacune in the policy. and the reform of development finance institutions especially those at the state level.
and could have turned positive on a trend basis if the rupee value had been maintained.Appendix: A REVIEW OF GROWTH AND DEVELOPMENT SINCE 1955 (THIS CAN PROBABLY GO. growth was much too small to overcome the problem of unemployment. The implications of this collapse of the current account and the reduction in the trade deficit despite major regime shift liberalising imports is yet to be widely realised. From the mid-eighties exports revived as there was partial correction of the rupee and private investments too began to rise much faster. This was a period when the ideology of growth and development dominated and the assumption was that in the adherence to the plan. The growth of the eighties was based on higher agricultural performance (3. and (v) the role of the public sector principally (See Appendix Table). because the rupee got out of line and was only partially corrected and that too only in 1986-87.5%. (ii) the nature of policies pursued.2% per annum).principally power. faster agricultural growth at 3. In the seventies and the sixties the fiscal deficit had never gone above 4. the recessions of 1964-65 brought the plan crashing down. and revival of public investments which were now directed better towards critically short infrastructure . This was despite continual liberalisation in the import regime. the large investments in the capital good sectors. Despite the green revolution the agricultural growth remained just a wee bit below 3%. More importantly. including small firm manufacturing and from about 1986 that of exports though even as late 1994 the country openness ratio was only that which had been achieved in the fifties. The first period which starting from 1955 we may call the Mahalanobis period is one of growth and diversification of the industrial sector. so that after a two year period of slow down or decline the GDP growth reached a record of nearly 7% which it maintained for the next four years. growth would ensure benefits to all sections of society.4 %. Essentially the economy adjusted far better and quicker than anticipated. Principally the inadequacy of demand. Small firm promotion got a boost in this period. and during this long stagnation other countries overtook India. (iv) agricultural and trade performance. export growth in response to the depreciation of the currency. The stabilisation episode of 1990-91 to 1991-92 is too well known to recall. The next period from 1965-66 to 1978-79 was one of very slow growth – the so called Hindu period where in the redistribution agenda came to the fore. The rise in private investments was strong enough to compensate the fall in
Indian Institute of Management. the rise of the public sector in manufacturing and in other areas of physical and social infrastructure. but growth rates of the industrial sector remained low. real appreciation of the currency and discrimination against exports. (iii) the orientation of the state. PLEASE ADD TABLE 1 (ORIGINAL) AS APPENDIX TABLE 1) There are three distinct periods in the Indian economy that we may infer based on: (i) the patterns of growth. The Plan and much of the control had already become dysfunctional but they continued to be important sources of rent. IF YOU RETAIN THIS. The responsiveness of the exports to the exchange rate was one of the best ever by a stabilising economy and its extent had not been anticipated even by the designers of the stabilisation. and the export pessimism which was a key aspect in the design of the Plan could not have a supply side strategy to be consistently pushed. increasing government expenditure which proved unsustainable. Politically during this period the argument of directly addressing the incomes of the poor through what where to become sop programmes arose. Indeed the rise in private investment raised the investment rate over the period. Essentially. Ahmedabad
.. and moderate growth of overall GDP. the decreasing openness of the economy. the high growth proved macro economically unsustainable with inflation rising to 10% and continuing to rise by 1990-91. The growth was led by the revival of industries and services. The factors underlying the revival were the further rise in private investments. The recovery of the 80s saw the revival of manufacturing. And the fiscal deficit of the central government reached 8 % of GDP. The current account deficit all but collapsed. For reasons that we will not discuss here while the plan succeeded in ensuring the diversification of the economy. and most importantly by the growth in exports which for a four year period grew at rates close to 20% per annum in dollar terms. The plan and policy moved far from the growth and transformation agenda. the severe fall in exports.
which was followed by a strong agricultural growth and both these factors revived growth to 8% which can. which at its best had reached a level of 29% of GDP! But the golden moment was lost when the rupee was allowed to get out line completely. S.. The relative decline of the private large firm sector alone would have been quite large since the sector had grown most rapidly in the period immediately following the stabilisation.
Indian Institute of Management. This is because the services sector being driven by the exports of software and related activities and having a near absolute advantage was less dependent upon the exchange rate than manufacturing exports which has to deeply compete with domestic sales. Agriculture despite its variations continued on an average to grow at 3.4%. Industrial and manufacturing growth had fallen to low 3. and it was easy to predict in 1997 that the economy would soon slow down unless the rupee was corrected (Morris. even with the fall in the interest rates could not happen. With. A fiscal boost was necessary. be maintained since the monetary stance of the RBI remains one of conservative monetary targeting. a delay the exports as one could have easily expected collapsed. Small firm growth during the period after the reform more or less is similar to the growth of manufacturing as such. 1997). That could only come with the investments in the Golden Quadrilateral in 2002. The resulting tightening of domestic credit particularly hurt small firms and local businesses many of which sold out to MNCs given the non level playing field that the asymmetry brought about. it was inevitable that a significant part of the same would have to be sterilised if the monetary targets had to be maintained. This it was not able to do.a. The rupee in real terms continued to be higher than its level immediately after the stabilisation so that export growth could never really reach the level of 20% p. rather than to depreciate the currency. With strong band wagon effects.2 to 3.public investments and still raise the level of investments. Conservative monetary policy being maintained over the next four years meant that a revival. And then the East Asian Crisis happened to virtually foreclose any quick revival since the response of the RBI was to use punishing interest rates time and again to rein in possible capital outflows. Only services sector could maintain high growth during the entire period. Growth soon cam down to more modest levels of 5%. but will not. Since 1994-95 an important new dimension which the Indian economy had to face was the macroeconomic management of large capital inflows on account of both portfolio and direct investments. Agriculture at this growth rate creates the potential for the GDP to grow much faster than what was achieved over the nineties. Private investments too could then be anticipated to not continue rising at the fast rate since further rise in private investment was contingent on the government being able to bring about regulatory and policy clarity in areas like power and water and urban infrastructure. Ahmedabad
.5% by 1999 and could rise to only 9% even in the revival of 2002-03. The slow down from 1996-97 though may be less severe than in the case of large firms as whole (which includes the public sector).
monetary targeting and restrictive. broadbase entrepreneurship. for exporting firms. government purchase. costs to the background. priority sector credit Beginnings Rising slowly during the latter half Beginning 1979-1990 high ( 5. declining value of priority sector credit Vital for survival for many High. declining Ex-post recognition of vital role of small firms given the 'schism' in the labour market. priority sector credit Rising Rises Rising 1990 -1997 high after adjustment (6. effective reduction of benefits of reservation. SSIs hit hard. government purchase and reservation. extreme overvaluation of rupee Low Very high Turned positive mid-way but with high degree of control High High or monopolistic High Economic (the Plan). flows pick up declining. declining high.5-5. but constrained by inversion and exchange rate Large
Subcontracting Exports Contribution of SSIs
Low or negligible Low and declines Negligible
Indian Institute of Management.20% High Expansionary. some reservation
Excise. lobbying power of SSIs.5%) 3. late partial correction of overvalued currency high.Appendix Table : Some Aspects of the Various Periods In India’s Growth and Development Experience Since 1955 Aspect/Orientation Growth Agricultural growth Agricultural surplus Thrust of macroeconomic policy Militancy of labour Bias against exports Attitude to foreign capital Protection level Industrial concentration Import repression Basis of SSI Policy 1955-1965 high (4. equilibrium pricing of rupee Low Moderate to nil. inflow due to low growth Very high Monopolistic or oligopolistic very high Intrinsic value of small entrepreneurs.5% High Conservative. higher K/O and N/O ratios and dispersal 1965-1979 Low ( 3.0 % Low but increasing Restrictive following demand recession and foreign exchange constraints.0%) 3. focus on fiscal deficit. large scale reservation. Ahmedabad
. declining Improves. search for a paradigm
Caps on large firms.5%) > 3. negl. tariff inversion for many labour intensive mfg Oligopolistic and (import) competitive Low Attempt at economic approach. redistributive Excise. inversion in tariffs hits SSIs hard. political Excise concessions. to support plan targets. huge inflows low. slow down employment.8 %) < 3. exports of small firms.00% Low Moderately expansionary. high overvaluation of rupee High High Restrictive. but no bias in favour Liberalised in quick stages. fiscal deficit balloons. other incentives esp. little change in direct policy. water in tariff Oligopolistic and competitive Moderately high.
0297 -0.0905 0.0145 0.0406 0.0585 0.0351 0.1037 0.0201 0.0390 0.0110 0.0319 0.0861 0.a.0316 0.0141 0.08 -0.0207 0.0279 0.1593 0.0177 0.0544 -0.1050 0.0036 0.0221 11282 738 224 2822 889 343 14104 1627 567 16298 5754 1897 1277 3048 3876 2586 8802 5773 3863 18437 5641 1292 1597 2681 3520 4243 8322 4812 5840 18974 9535 668 294 2715 932 360 12250 1600 654 14504 8295 2866 2952 5864 7540 10231 14160 10406 13183 37748 8486 1957 2928 5321 5704 7988 13808 7661 10917 32385 11060 630 240 3610 1080 400 14670 1710 640 17020 19466 5550 7697 17761 25628 26544 37227 31179 34241 102646 16819 3695 5992 8639 11345 13516 25458 15040 19508 60006 -0.82 3.0570 0.0339 0.0285 -0.0224 0.83 2.0579 0.63 3.0258 0.0151 0.0133 -0.0356 0.0510 0.1030 0.crore)
Gross value added at current prices (Rs.91 5.0069 0.0063 0.0199 0.0825 0.0469 0.0613 0.0140 0.0815 0.56 6.0320 0.0111 0.45 4.0361 0. Crore)
0. 1989-90 p.0564 0.0399 0.06 5.0039 0.1889 0.0117 -0.0026 0.0410 0.0036 0.0366 0.55 25.89 5.0282 -0.66 4.06 3.91 3.1286 0.Table 1: A Picture of the Non-Factory Manufacturing Sector in Recent Times (As Revealed from Official Statistical Sources) 2000-01 1994-95 over over 20001989-90 1994-95 2000-01 01 p.15 1.0343 0.0447 0.0259 0.65 33. No of Enterprises (000) Rural OAME NDME DME Urban OAME NDME DME All OAME NDME DME Total Rural OAME NDME DME Urban OAME NDME DME All OAME NDME DME Total Rural OAME NDME DME Urban OAME NDME DME All OAME NDME DME Total Employment (million) Rural OAME NDME DME Urban OAME NDME DME All OAME NDME DME Total 24.0066 0.0349
Fixed capital at replacement cost (Rs.0498 0.0043 0.0144 0.0077 0.0045 0.0336 -0.0090 0.1028 0.93 2.0317 0.20 22.0033 0.0296 0.0266 0.0121
Indian Institute of Management.0633 0.20 19.46 37.0863 0.1020 0.1419 0.0836 0.0045 0.0247 0.0094 0.0541 0.0936 0.0233 -0.0208 0.0018 -0.0467
2000-01 over 198990 -0.0089 0.0459 0.0104 0.0366 0.84 1.85 32.0045 -0.0407 0.0097 -0.1106 0.1555 -0.0130 -0.a.0572 -0.1268 0.0339 0.1478 0.1286 0. Ahmedabad
.0211 0.0410 0.25 5.37 2.0295 0.0030 0.0504 0.0404 0.46 17.
) Nature of industry Diversified/industry specific B. complexity) Traditional industries Social capital Cluster structure Role of large firms Type of clusters Cluster life cycle Existence of facilitating institutional framework Universities/R&D institutions Associations (standards. Factors Internal to the Cluster Spatial proximity Horizontal inter-firm linkages between firms producing similar products Vertical inter-firm linkages (user-producer) Demanding customers High tech (tacit. testing etc. knowledge flows seem to be more important for science based industries Limited evidence Nature of knowledge flows may differ Positive if customer demanding and has less market power Generally positive Important location in the network/chain matters Depends on technology gap and objectives of FDI Encourage efforts to access knowledge Optimal levels of competition? Local manufacturing?
C. measurement difficult Positive? Limited evidence Limited evidence Higher during early phases (Tacit knowledge) critical Critical for high-tech and some traditional Important for all types Limited evidence.
FDI policies Source: Basant (2002).
Indian Institute of Management. External Links of the Customers/Suppliers External customers Links with equipment suppliers/R&D institutes Links with global production network or commodity chain Foreign direct investment Policy Initiatives.Table 2: Determinants of Knowledge Flows in Geographically Bound Clusters – A Summary Likely Effect on Knowledge Flows Factors (Empirical Evidence) A. Ahmedabad
. Environment Enhancing competition (trade liberalization) Positive. Passive externalities and potential for active cooperation. flow of tacit knowledge Positive but collaboration generally weak Positive. collaboration relatively strong Positive Generally positive but depends on production organization Mixed results? Positive.
8 100 (79.2 25. 1999-2000 System Analysts and Programmers 17.3 100 (169.8 100 (75.8) Computing Machine Operators 38. Note: Figures in parentheses report number of workers in thousands in each category. Private Limited Co.7 11.5 5.
Indian Institute of Management.4)
Type of Enterprise Informal (Partnership/ Proprietary) Public Limited Co.0 8.Table 3: Distribution of Workers with IT Occupations by Enterprise Type.0 35.5 100 (324.3 28.7)
All Enterprises Source: Basant and Rani (2004). Not Known
Total 38.8 29.3 18.4 19.0 8.5) Automatic Data Processing Machine Operators 56. Ahmedabad
.4 35.8 23.
4 -0. S. 2
China Korea India Malaysia Thailand Indonesia 1980 1990
Detrend of Log of GDP in Major Sectors
0.24 DLA11(GDPFC) DLA16(Agri. 1
Deviations of PPP from Structurally Determined Values
Indian Institute of Management.4 0.2 -0. (1997)
-0.Fig.16 1950 1960 1970 1980 Year
0.2 0 -0. Ahmedabad
.6 -0.8 -1 1960 1970 Year
Fig.) DLA17(Industry) DLA18(Services)
Growth Rate in Index of Industrial Production
0.Detrend of Log of Growth Rates in Reg.12
0.22 Reg.64 Mfg. and Unreg. Mfg (GDP in Mfg.16 1990 1993 1996 1999 2002 2005
Indian Institute of Management.02
0. Basic Capital
04 -0.Fig. Exports
Indian Institute of Management.06 0.34 0.24 0.44 0.14 0.) Defl. Growth Rate in Index of Industrial Production (Mfg. Ahmedabad
.15 0.) 0.)
0.03 0 1980
Fig.12 0.06 1970 1980 1990 Year 2000 2010 Value of Prod. 6
Growth Rate of Value of Production and Exports in SSIs
(Deflated by Implicit GDP(Mfg.09 0. 5
Fig.07 -0.03 -0.01 -0.23 -0.09 0.07 -0.13 -0.13 0. 8
0.15 0.12 0.11 1970 1980 1990 Year
Detrend of Log of Deflated Values of Value of Production and Export of SSIs
0.05 0. Ahmedabad
Indian Institute of Management.18 0. SSIs (exponential growth rates)
Employment Growth in Reg.17 0.27 0.06 0.03 0 1970 1980 1990 Year
06 0. 2 .02 -0.2 5
B a n k
C r e d it /
G D S
(X 0 .18 0.14 0. ( 2 0 0 1 c
1 1 9
0 .0 1 )
1 2 9
S o u r c e : F ig . S . V I I.02 1970
Fig. M o r r is .1 9
g d s /g d p m p g b c /g d s
G ro s s
0 . of Reg.2 3 1 0 9
0 .1 0. SSI Units (exponential growth rates)
0.22 0.Growth Rate in the No. Ahmedabad
.1 7 1 9 7 0 1 9 7 5 1 9 8 0 1 9 8 5 y e a r 1 9 9 0 1 9 9 5 2 0 0 0
Indian Institute of Management.2 1
2 9 1 9 7 0 1 9 7 5 1 9 8 0 1 9 8 5 y e a r 1 9 9 0 1 9 9 5 2 0 0 0
1 .4 4
1 .V II.( 2 0 0 1 c )
2 . of Workers 0.3 9
T r e n d s in t h e ( a s a r a t io ) S
0 .3 4
0 .Days Lost/All Workers (R) 15 12 9 4 6 2 3 0 1970 1975 1980 1985 Year 1990 1995 2000
Indian Institute of Management.3 :.M o r r is . & Mandays Lost in Disputes by No. S .4
0 .5 4
2 h b a n k d e p /h g fs a v h b a n k d e p /h d is in t
0 .Fig.in Disputes/ All Workers Man.5 9
B a n k
o u rc e
D e p o s it s
fr o m
F ig . Ahmedabad
Workers Involved in Disputes.001) (X 0.
World Development. 27. Praeger.. Hoselitz. Bert F (1960): Role of Small Industry in the Process of Development. The Hague. UNIDO.5. No. et al (2001) Bell. K. Firm Behaviour and Performance”. Kumar. (1978). Basant. Economic and Political Weekly. No. R (2004a). Albin.11. The Histotsubashi Journal of Economics. Ernst. XVII. July-Dec. Mass. in Morris. Vol. "Ancillarisation of the Auto-Component Sector in India: Strategies for Capability Building and Integration in Global Markets of Small Scale Firms. June. Alice (1995): "Wages. Press. pp. Patrizio. Alice (1989). Basant Rakesh (2001) “Nature of Competition. Guerrieri. pp. Press. Amsden.-India Technology Cooperation and Capability Building: The Role of Inter-firm Alliances in Knowledge-Based Industries".5. D.) (1981). February 20. Iammarino and C. 1715-1734. Journal of Indian School of Political Economy. V. N (2001). New Delhi. pp. Keshabananda (1997): "Politics of Industrial Location: Indian Federalism and Development Decisions".286-298. No. Singapore
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